HSBC braces for $1.1 billion Madoff hit after court setback

HSBC is preparing to absorb a $1.1 billion hit in its third-quarter results after a Luxembourg court ruled against the bank in a long-running lawsuit connected to Bernard Madoff's multibillion-dollar Ponzi scheme, underscoring the lingering financial and reputational risks major banks continue to face from the 2008 financial crisis fallout.

The provision follows a decision by the Luxembourg Court of Cassation, which rejected HSBC’s appeal regarding the restitution of securities claimed by Herald Fund SPC, a Cayman Islands-based fund that lost assets in Madoff’s fraud. While the court sided with HSBC on a separate cash restitution claim, the bank remains exposed to significant potential liabilities as the legal process continues.

Herald Fund SPC, which had hired HSBC’s Luxembourg unit as a custodian for assets invested with Bernard L. Madoff Investment Securities, initially sued the bank in 2009, alleging it failed in its duty to protect client assets. The fund sought more than $2 billion in cash and securities, later upping its claim to $2.5 billion plus interest, or damages of $5.6 billion plus interest, according to court documents.

HSBC has stated it will pursue a further appeal before the Luxembourg Court of Appeal and, if unsuccessful, will contest the amount to be paid in subsequent proceedings. The bank emphasized that “the eventual financial impact could be significantly different” from the current provision, reflecting the ongoing uncertainty surrounding the case.

The $1.1 billion charge is expected to shrink HSBC’s core equity tier 1 capital ratio – a key measure of financial strength – by about 15 basis points. As of June, the ratio stood at 14.6%. Analyst estimates compiled by the bank had forecast the third-quarter ratio at 14.5%, and Morningstar’s assumption is that it will hover around 14% over the next decade.

Lorraine Tan, director of equity research for Asia at Morningstar, said she does not expect the charge to affect HSBC’s operations, though it could weigh on sentiment. In an interview with CNBC, Tan noted that HSBC was “hoping that these one-off impairments were cleaned up after the interim write-offs.”

The ongoing litigation is a reminder of the far-reaching consequences of Madoff’s fraud, which defrauded clients of as much as $65 billion over four decades. Madoff, who was arrested in December 2008 and pleaded guilty the following year, died in prison in 2021 after serving just over a decade of his 150-year sentence.

HSBC is not the only major lender to have been drawn into legal battles stemming from the Madoff scandal. In 2014, JPMorgan agreed to pay $2.6 billion to resolve charges related to its role in the affair.

The bank’s most recent annual report indicates it remains involved in other Madoff-related litigation. Last month, a New York court dismissed a separate case seeking $324 million, citing the statute of limitations.

HSBC is currently undergoing a restructuring under CEO Georges Elhedery, with plans to split its operations into four divisions and cut costs by about $300 million this year. The bank has already suspended share buybacks for the next three quarters due to its acquisition of a majority stake in Hang Seng Bank.