November 19, 2009 / 4:54 PM / 10 years ago

HSBC unit told to review controls post Madoff

* Regulator says HSBC unit has 3 months to review controls

* Regulator says Luxembourg court to decide on Madoff claims

By Antonia van de Velde

BRUSSELS, Nov 19 (Reuters) - Luxembourg’s financial watchdog has ordered HSBC’s (HSBA.L) (0005.HK) Luxembourg fund services arm HSSL to tighten internal controls after the Herald fund for which it was custodian lost nearly $1 billion of client money to Wall Street fraudster Bernard Madoff.

In a statement posted on its website on Wednesday, Luxembourg regulator CSSF ordered HSBC Securities Services (Luxembourg) (HSSL) to complete a review of internal rules within three months to ensure that it fulfilled all the requirements of a depositary bank.

HSSL acted as depositary bank and custodian for the Herald (Lux) fund while Austria’s Bank Medici had been ‘sponsor’ and investment manager of the fund.

The Herald fund faces claims by investors who are trying to recover the money they lost but the debate is still open on whether custodian banks should also be liable for any of the Madoff-related losses. [ID:nN27300953]

The CSSF did not specifically say that HSSL was deficient.

Investor activist group Deminor, which acts on behalf of clients who lost money in Luxembourg, says HSBC and Bank Medici failed to put the necessary control mechanisms and contractual safeguards in place when delegating their functions to Madoff.

The CSSF said it was for courts to decide whether HSSL was liable under a civil claim to compensate investors.

HSBC said it believed it had complied with all obligations as the depositary bank of Herald Lux and agreed with the CSSF that it was solely for civil courts to determine the outcome of the issue.

“HSBC continues to believe that it has good defences to any claims brought against it and will vigorously defend itself against any such claims,” HSBC said in an emailed statement.

SEPARATE UBS CASE

Earlier this year the regulator approved changes proposed by UBS’s UBSN.VX Luxembourg custodian bank, which was also exposed to the fraud by Madoff, who is serving a 150-year prison sentence after pleading guilty to the decades-long investment fraud of as much as $65 billion.

Total losses for clients who invested in two funds set up by UBS on behalf of clients amounted to around $1.7 billion at the end of September, UBS said in its financial report.

The CSSF also said the documents submitted to the regulator on three funds which were liquidated earlier this year did not contain any reference to Bernard Madoff Investment Securities (BMIS), rejecting claims that it had been aware of links before Madoff was arrested in December 2008.

“Between the launch of the various Sicav and the breakout of the Madoff affair in December 2008, the CSSF was never informed in a transparent manner, by the professionals involved, of the structure actually set in place nor of the role played in practice by BMIS at different levels of this structure,” the CSSF said. (Editing by Greg Mahlich)

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