HSBC Sued Over $578 Million ‘Fake’ Profit From Madoff

Date: Wednesday, July 15, 2009
Author: Bloomberg.com

HSBC Holdings Plc and a Cayman Islands-based hedge fund were sued by the trustee liquidating Bernard Madoff’s business over claims they withdrew $578 million in “fake” profit from the con man’s firm before it collapsed.

The lawsuit, filed today by trustee Irving Picard in U.S. Bankruptcy Court in Manhattan, claims London-based HSBC withdrew most of the money on behalf of its client, Herald Fund Spc, less than 90 days before Madoff’s firm began liquidating. Picard says such transfers are recoverable under U.S. bankruptcy law.

The so-called clawback lawsuit against HSBC and Herald is one of at least eight filed against the biggest investors in York-based Bernard L. Madoff Investment Securities LLC. The earlier complaints seek a total of $13.7 billion in damages to be used to repay victims of Madoff’s fraud.

“HSBC continues to believe that it has good defenses to the claims and will vigorously defend itself against the actions that have been brought,” Patrick McGuinness, an HSBC spokesman, said today in an e-mail.

Today’s lawsuit names Herald Fund’s beneficiary bank, London-based HSBC Bank Plc, and its asset custodian, HSBC Securities Services (Luxembourg) SA. In April, Herald Fund filed a lawsuit in a Luxembourg court against the same HSBC unit, seeking 1.6 billion euros ($2.15 billion) in assets the bank allegedly reported in its last value calculation.

Biggest Ponzi Scheme

Madoff, 71, pleaded guilty in March and was sentenced on June 29 to 150 years in prison for using money from new clients to pay earlier investors in the biggest U.S. Ponzi scheme. Prosecutors said the money manager told clients they had as much as $65 billion invested with him. The government has documented losses of about $13 billion. Picard, hired by the Securities Investor Protection Corp., said earlier this month that $1.08 billion had been recovered.

Investors withdrew about $12 billion from Madoff’s firm last year, including about $6 billion in the 90 days before the Madoff bankruptcy, Picard has said. Some of the lawsuits claim the defendants knew, or should have known, of the fraud.

Three other Caribbean hedge funds have been sued, including Cayman Islands-based Harley International Ltd., which allegedly took $1.07 billion in fake profit from Madoff’s firm. British Virgin Islands-based Vizcaya Partners Ltd. is accused of taking $150 million. Picard seeks default rulings against both funds for failing to respond to the lawsuits, court records show.

Hamilton, Bermuda-based hedge fund Kingate Management Ltd. was sued by Picard in April for $255 million. A month later, Picard sued three hedge funds run by New York-based Fairfield Greenwich Group over claims they took $3.54 billion from Madoff’s firm before the massive fraud unraveled.

Picower, Chais, Merkin

Longtime Madoff investor Jeffry Picower, a lawyer and philanthropist, was sued by Picard in May for allegedly taking $6.7 billion in fictitious profit for himself and his affiliates over a 20-year period. Philanthropist Stanley Chais, hit with a similar complaint seeking $1 billion in damages, told a judge that Madoff almost wiped him out and he can’t afford to defend against Picard’s claims.

Picard earlier sued New York financier J. Ezra Merkin for $557.8 million for allegedly withdrawing “non-existent principal” through his Gabriel Capital fund and two others.

The group of lawsuits are moving forward in U.S. Bankruptcy Court in New York, even as some victims claim Picard is taking too long to pay them back.

Picard is seeking at least $735 million from Madoff customers without suing -- an effort that got a boost when Banco Santander SA, Spain’s biggest bank, agreed to pay $235 million to settle claims that two of its hedge funds profited by directing billions of dollars to Madoff for more than 10 years.

The case is Irving H. Picard v. Herald Fund Spc, 09-01359, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

To contact the reporter on this story: Erik Larson in New York at elarson4@bloomberg.net.