By Stephanie Bodoni – Aug 10, 2011 8:01 PM ET
HSBC Holdings Plc (HSBA)’s U.S. court victory against Irving Picard, the trustee liquidating con man Bernard Madoff’s management firm, may be a boost for investors who filed lawsuits against HSBC and UBS AG in Europe.
U.S. District Judge Jed Rakoff in New York on July 28 threw out Picard’s suit seeking almost $9 billion, ruling the trustee can’t bring common-law claims against the bank.
HSBC, Europe’s largest bank, faces more than 50 complaints in Ireland for allegedly failing in its duties as custodian for Thema International Fund Plc, a European Union-regulated fund that had $1.1 billion in assets two weeks before Madoff was arrested. Investors who lost millions of dollars through Access International Advisors LLC’s LuxAlpha Sicav-American Selection fund filed more than 100 lawsuits against UBS in Luxembourg.
“The hot potato has now been handed back to Luxembourg and Ireland,” said Edouard Fremault, a senior analyst at Deminor International, which advises more than 2,500 investors with losses in Madoff-linked funds in Europe.
Custodians are responsible for oversight of funds and manage deposits and payments to investors. Investors suing UBS and HSBC say the banks should have uncovered Madoff’s fraud.
Custodian Banks
“What interests us mainly is the negligence of UBS and HSBC in their function as custodian banks of European funds,” said Fremault.
Picard last week lost a case against UniCredit Bank Austria AG, a unit of UniCredit SpA (UCG), Italy’s biggest bank. Rakoff in an Aug. 6 order added the unit to his July 28 decision that the trustee has no standing to bring common-law claims against UniCredit and HSBC.
“The decision of the New York court demonstrates the importance of investors being able to take action for themselves against custodians rather than having to rely on third parties, whether it be liquidators or funds, to recover their money,” said Paul Kennedy, a lawyer at Dillon Eustace, who represents 50 Thema and Kalix Fund Ltd. investors suing HSBC in Ireland.
Picard in December filed a revised complaint in U.S. Bankruptcy Court against London-based HSBC, accusing it of aiding Madoff’s fraud. The complaint seeks to recover $2 billion in transfers out of Madoff’s business. It also asserted common- law claims seeking at least $6.6 billion from HSBC and about $2 billion from a group of 36 other defendants, including Milan- based UniCredit, according to Rakoff’s ruling.
Bankruptcy Claims
Amanda Remus, a spokeswoman for Picard, said the trustee “has not yet decided whether it will appeal Judge Rakoff’s” order and is “reviewing the district court decision as well as preparing to move forward in the bankruptcy court on the remaining” claims of more than $2 billion.
HSBC and Zurich-based UBS declined to comment on the European lawsuits.
Picard is now more limited in the actions he can take, said Pierre Reuter, a lawyer acting in about 100 lawsuits by investors against UBS and HSBC in Luxembourg.
“It reinforces the importance of cases brought by investors in Europe,” Reuter said in an interview.
Rakoff took the case out of bankruptcy court and considered whether Picard could bring common-law claims, such as aiding and abetting Madoff’s fraud. The judge said all common-law claims must be dismissed, with the remainder of the case returned to the bankruptcy court.
‘Real Risk’
Rakoff’s decision “is a very important development, especially for European investors,” said Fremault. “The real risk now for HSBC and also UBS lies again in Luxembourg and Ireland.”
Luxembourg is the second-largest mutual fund market after the U.S., with about 3,749 registered funds holding 2.18 trillion euros ($3.14 trillion) in assets as of June. Luxembourg ranks first in Europe before France and Ireland.
A commercial court in Luxembourg in a March 2010 ruling concerning 10 test cases said investors can’t bring individual lawsuits for damages and liquidators alone can recover capital assets. The decision is under appeal by investors in LuxAlpha which invested 95 percent of its assets with Madoff, and had $1.4 billion in net assets a month before the former Nasdaq Stock Market chairman’s December 2008 arrest.
Any ruling may affect claims by investors of Luxembourg Investment Fund and Herald (Lux) US Absolute Return, which were also dissolved after Madoff’s Ponzi scheme was uncovered. The three Luxembourg-based funds’ liquidators have sued the funds’ custodian banks and auditors.
Picard ‘Setback’
Rakoff’s decision “is a setback for Picard, but it won’t likely change anything to our strategy,” said Carlo Reding, one of two Luxembourg liquidators for the Herald (Lux) fund. “From the beginning we stayed on the Luxembourg route and we have been in discussions with Picard and will continue to do so.”
Thema and Kalix investors have complaints pending against HSBC in Ireland. HSBC in June agreed to pay $62.5 million to settle a group lawsuit filed by Thema investors in New York. The settlement is subject to court approval in the U.S. An Irish court is reviewing a claim by Thema that the U.S. settlement shouldn’t be enforced in the country.
A few days after the Rakoff decision, UBS asked Judge Colleen McMahon to dismiss the trustee’s case seeking more than 2 billion based on common-law claims.
“There’s a very good likelihood” the U.S. judge in the UBS case “would make a very similar ruling to what Judge Rakoff did,” said Chip Bowles, a bankruptcy lawyer at Greenebaum Doll & McDonald PLLC in Louisville, Kentucky.
“There’s a fairly high likelihood that once he’s ruled that way, I don’t think the other District Court judge would rule against him,” said Bowles in a telephone interview.
Madoff, 73, pleaded guilty in 2009 and was sentenced to 150 years in prison for using money from new clients to pay earlier investors.
The main U.S. case is Securities Investor Protection Corp. v. Bernard L. Madoff Investment Securities LLC, 08-ap-1789, U.S. Bankruptcy Court, Southern District of New York (Manhattan).
To contact the reporter on this story: Stephanie Bodoni in Luxembourg at sbodoni@bloomberg.net
To contact the editor responsible for this story: Anthony Aarons at aaarons@bloomberg.net
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