HSBC to take $1.1 billion hit after Luxembourg court ruling in Madoff case

By Rishav Chatterjee and Selena Li

(Reuters) -HSBC Holdings said on Monday it will book a $1.1 billion provision in its third-quarter results after losing part of an appeal in a long-running lawsuit tied to Bernard Madoff's Ponzi scheme.

HSBC acted as a service provider to several funds that invested with Bernard L. Madoff Investment Securities LLC. Herald Fund SPC sued HSBC's Luxembourg unit in 2009 seeking restitution of assets it said were lost in the fraud.

Last Friday, the Luxembourg Court of Cassation rejected an appeal by HSBC's unit over the restitution of securities claimed by Herald, although it accepted its appeal on a separate cash restitution claim, the bank said.

HSBC now plans to lodge a second appeal with the Luxembourg Court of Appeal and if unsuccessful, the bank said it would contest the amount to be paid.

It added that the eventual financial impact could differ significantly from its current estimate.

Europe's largest bank by assets, which reports its third-quarter earnings on Tuesday, said in July that Herald, which is in liquidation, was seeking the restitution of securities and cash worth $2.5 billion plus interest or damages of $5.6 billion plus interest.

HSBC did not immediately respond to a request for comment on the separate securities and cash amounts that Herald is seeking. The principal liquidators of Herald also did not immediately respond to a request for comment.

The bank estimated that the provision would have an impact of around 15 basis points on its common equity tier 1 (CET1) capital ratio.

That would come on top of a 125 basis points impact arising from its $13.6 billion deal to take its majority-owned Hong Kong unit Hang Seng Bank private.

The charge could weigh on sentiment slightly but the impact should be limited as HSBC has already suspended dividend payments for the next three quarters due to the acquisition of Hang Seng Bank, said Lorraine Tan, director of equity research (Asia) for Morningstar.

The bank's Hong Kong-listed shares were flat in morning trade, trailing a 1% increase for the benchmark Hang Seng Index.

Madoff's fraud was estimated as high as $64.8 billion.

It went undiscovered for many years until Madoff confessed to his sons in December 2008, one day after his firm's Christmas party. Madoff eventually pleaded guilty to 11 criminal counts. He died at age 82 in April 2021 while serving a 150-year prison sentence.

HSBC in 2012 settled with Kalix Fund for an undisclosed amount, also over losses the fund had suffered during the collapse of Madoff's financial empire. The fund had sued the bank for $35.6 million.

(Reporting by Rishav Chatterjee in Bengaluru and Selena Li in Hong Kong; Editing by Edwina Gibbs)