HSBC Says Madoff-Era Liability Rules for Custodians Less Strict

HSBC Holdings Plc, custodian of a fund that lost about 1.1 billion euros ($1.5 billion) through Bernard Madoff’s Ponzi scheme, said liability rules for banks in Europe weren’t as strict at the time of the scandal surrounding the convicted fraudster.

The fund in question had “very specific obligations” to investors, HSBC said at the High Court in Dublin today on the third day of a trial scheduled to last 14 weeks. Thema International Fund Plc is seeking about $1.5 billion in damages. The case is the first of dozens of disputes in Europe to focus on the liability of banks as custodians to investment funds that put money with Madoff, who was charged in December 2008.

HSBC, Europe’s largest bank, faces more than 50 complaints in Ireland over claims it failed to discover Madoff’s activities. The fraud hurt several European Union-regulated funds, or UCITS, like Dublin-based Thema. At least three UCITS, which stands for Undertakings for Collective Investment in Transferable Securities, have since been liquidated.

At the time “there was no strict liability” on the custodian, Paul Gallagher, a lawyer for the London-based bank, told Judge Peter Charleton during his opening arguments. “Since the Madoff scandal,” European legislators proposed new rules that “will impose a strict liability regime on the custodian.”

Tougher Regime

Lawmakers in the European Parliament this month are set to vote on draft rules that would impose a tougher regime for banks. The European Union unveiled the new rules in July to safeguard investment funds’ assets and to prevent another fraud similar to Madoff’s Ponzi scheme. The measures must be adopted by the assembly, and signed off by nations in the EU’s Council of Ministers, before they can take effect.

“This suit is the investors’ only hope of recovery,” Dermot Gleeson, a lawyer for Thema, told the court earlier this week.

Banks argue that as a custodian they were responsible to manage deposits and payments to shareholders.

“This case is being presented to you as if Thema as investment manager had no role at all in this,” HSBC’s lawyer Gallagher said. Thema is presenting a “complete abdication of its duty of care to scrutinize” Madoff and “his returns over 12 years.”

On Thema claims that HSBC should have discovered the fraud by Madoff, Gallagher said: “we didn’t and couldn’t have and his process and his records were so sophisticated that they defied” discovery by far more resourced and powerful investigators.

Madoff, who turned 75 on April 29, pleaded guilty in 2009 to orchestrating what prosecutors called the biggest Ponzi scheme in history, using $65 billion in real and artificial assets. He is serving a 150-year sentence in U.S. federal prison.

Confidential Settlement

HSBC settled a related case last year, a day after a trial started in Dublin. Kalix Fund Ltd., which had invested money with Thema, was seeking $35.6 million before reaching the confidential settlement.

The hearing is taking place in part of the city’s criminal court building, which has larger rooms and was commandeered to accommodate the ranks of lawyers and their boxes of files.

Hundreds of suits were also filed in Luxembourg against UBS AG over its custodian duties to Access International Advisors LLC’s LuxAlpha Sicav-American Selection, another UCITS fund, which failed after Madoff’s activities were discovered.

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