HSBC Holdings Plc is bracing for a $1.1 billion hit after losing a prolonged legal battle linked to the infamous Bernie Madoff Ponzi scheme, reigniting scrutiny over the bank’s role in one of the largest financial frauds in history.
Shares of the banking group fell as much as 2.4% on the FTSE 100 on Monday after it confirmed plans to set aside the amount in its third-quarter results.
The provision follows a Luxembourg court ruling against HSBC Securities Services Luxembourg (HSSL) in a lawsuit brought by Herald Fund SPC, a European investment fund that had channeled money into Madoff’s operations before the scheme collapsed in 2008.
Herald sued HSSL in 2009, claiming losses of cash and securities entrusted to it as custodian, seeking restitution valued at up to $2.5 billion plus interest, or damages of $5.6 billion.
Last week, the Luxembourg Court of Cassation dismissed HSSL’s appeal concerning Herald’s securities restitution claim, prompting HSBC to recognize the potential financial blow. However, the court upheld HSSL’s appeal on the cash restitution claim, leaving room for a possible reduction in total liability. HSBC said it “will pursue a second appeal before the Luxembourg Court of Appeal” to challenge the amount it may ultimately have to pay.
The Madoff scandal, a $65 billion fraud that deceived thousands of investors, continues to cast long shadows over global financial institutions. Madoff, who admitted to running the scheme in 2009, died in prison in 2021. HSBC has acknowledged that several of its entities “provided custodial, administration and similar services to a number of funds incorporated outside the US whose assets were invested with Madoff Securities,” leading to multiple lawsuits over the years.
The latest financial setback comes as HSBC faces mounting strategic and operational pressures. The bank recently announced plans for a $13.6 billion deal to take its Hong Kong-listed subsidiary, Hang Seng Bank, private, forcing it to suspend share buybacks for the next three quarters to conserve capital.
Despite this turbulence, HSBC’s shares remain up nearly 27% this year, buoyed by an aggressive restructuring drive under CEO Georges Elhedery. Yet, the $1.1 billion Madoff-related hit underscores the lingering costs of past entanglements as the bank seeks to reinforce investor confidence and maintain profitability in a volatile global market.