HSBC is once again entangled in the sprawling legal fallout from Bernie Madoff’s infamous Ponzi scheme. On Monday, the bank announced it would set aside $1.1 billion in its third-quarter results after partially losing an appeal tied to the decade-plus court battle over Madoff-related losses.
The financial hit stems from HSBC’s role as a service provider for several investment funds that funneled money into Bernard L. Madoff Investment Securities LLC. In 2009, the Herald Fund SPC sued HSBC’s Luxembourg arm, seeking to recover assets it claims were lost due to Madoff’s fraud.
Last Friday, Luxembourg’s Court of Cassation ruled against HSBC’s appeal to retain certain securities claimed by Herald. However, the court sided with the bank on a separate issue regarding cash reimbursements.
HSBC says it plans to challenge the decision again, this time in Luxembourg’s Court of Appeal, and warned that the eventual financial toll could differ significantly from its current estimates. The bank emphasized that it would continue to contest the size of any future payouts.
Herald Fund, now in liquidation, is demanding the return of $2.5 billion in securities and cash—plus interest—or $5.6 billion in damages. HSBC declined to comment on the specifics of Herald’s claims. Liquidators for the fund also withheld comment.
Europe’s largest bank by assets, HSBC will report its third-quarter earnings on Tuesday. In July, it flagged the potential for significant claims tied to the Herald case and acknowledged it might have to create additional legal reserves.
HSBC said the new provision will knock about 15 basis points off its core capital ratio (CET1). That hit comes on top of a 125-basis-point reduction related to its recent $13.6 billion deal to buy out the remaining stake in its Hong Kong affiliate, Hang Seng Bank.
Lauren Tan, equity research director at Morningstar Asia, noted that while the loss might dampen investor sentiment, the broader impact should be limited—especially since HSBC has already paused its share buyback program for the next three quarters due to the Hang Seng transaction.
Shares of HSBC fell 1.65% in Hong Kong on Monday, even as the Hang Seng Index rose 1%.
Madoff’s fraud, estimated at $64.8 billion, went undetected for years until December 2008, when he confessed to his sons the day after the company’s Christmas party. He later pleaded guilty to 11 criminal charges and died in prison in April 2021 at age 82, serving a 150-year sentence.
This isn’t HSBC’s first payout tied to the Madoff scandal. In 2012, the bank quietly settled with the Kalix Fund over similar losses. That case originally sought $35.6 million in damages.