HSBC Unit Can't Duck $124M Fairfield Suit In New York

Originally posted on Law360

By Alex Wittenberg
Law360 (January 5, 2024, 5:22 PM EST) — A Swiss subsidiary of HSBC Holdings PLC must face a more than $124 million clawback lawsuit in New York brought by the liquidators of funds that channeled money to Bernie Madoff’s fraudulent investment firm, a bankruptcy judge ruled this week, rejecting the London-based bank’s bid to dismiss the case for lack of jurisdiction.

In an opinion issued Thursday, U.S. Bankruptcy Judge John P. Mastando III said HSBC Private Bank Suisse SA’s American contacts and dealings belied its claims that the New York federal court lacked the power to decide what it said were essentially foreign issues. The Swiss unit used correspondent accounts at a U.S. affiliate and communicated with an American fund manager to discuss its investments, actions that Judge Mastando said gave the court jurisdiction.

The Swiss business chose to use accounts with HSBC’s U.S. subsidiary instead of a foreign bank in transactions with Madoff feeder funds, according to the opinion. Its workers also spoke with New York-based employees of the feeder funds’ manager, Fairfield Greenwich Group, the judge noted.

“Defendant’s selection and use of U.S. correspondent accounts and communications with Fairfield Greenwich Group support the court’s exercise of jurisdiction over the claims,” Judge Mastando wrote. “The contacts are not random, isolated, or fortuitous.”

The more than decade-long dispute between the liquidators and HSBC Private Bank Suisse stems from the unit’s purported investments in funds — including Fairfield Sentry and Fairfield Sigma — that fed money to Madoff’s firm, thereby supporting his Ponzi scheme. Madoff used money from feeder funds like Fairfield Sentry to pay out other investors.

Judge Mastando’s ruling allows the liquidators to pursue in New York bankruptcy court their effort to recover the more than $124 million in redemption payments that they allege the HSBC subsidiary received from the feeder funds between 2004 and 2008. The plaintiffs argue that the HSBC unit, as an investor in the Fairfield funds, received payments based on valuations that it knew were inflated.

HSBC Private Bank Suisse contended that the adversary case shouldn’t have been filed in New York bankruptcy court at all, maintaining that the liquidators were effectively asking the court to decide a matter of British Virgin Islands law. It said neither of the plaintiffs’ two bases for personal jurisdiction satisfied a minimum contacts test.

“Plaintiffs were left grasping at straws to justify their continued pursuit of claims against [HSBC Private Bank Suisse] and hundreds of others in New York, a forum with no connection to the redemption transactions at issue,” the bank said in a 2021 memorandum.

But Judge Mastando said Thursday that the bank “accomplished the conduct at the heart of the liquidators’ claims through its use of the correspondent accounts” in the U.S. Citing Second Circuit precedent, the judge found that the use of in-forum correspondent accounts to “perpetrate the alleged violations” supported a finding of sufficient minimum contacts.

Judge Mastando also referenced evidence showing a U.S. business of HSBC met with Fairfield Greenwich Group and shared information from the meeting with the Swiss subsidiary.

“These contacts demonstrate more than mere purchases or a one-time visit to the forum,” according to the opinion. “The liquidators have demonstrated facts showing continuous and systemic contacts with the forum.”

The ruling is one development in a web of cases spawned by the 2008 collapse of Madoff’s investment firm and his subsequent 150-year sentence for operating a Ponzi scheme. In 2020, the U.S. Supreme Court declined to hear an appeal in a matter involving HSBC and Fairfield Sentry that challenged a Second Circuit ruling that the trustee for Madoff’s firm could claw back billions in Ponzi scheme proceeds transferred to foreign parties.

Counsel for the liquidators declined to comment Friday. Representatives of HSBC Private Bank Suisse did not immediately respond to requests for comment.

The liquidators are represented by Jeffrey L. Jonas, David J. Molton, Marek P. Krzyzowski and Kyle Dorso of Brown Rudnick LLP.

The HSBC unit is represented by Nowell D. Bamberger and Jeffrey Rosenthal of Cleary Gottlieb Steen & Hamilton LLP.

The case is Fairfield Sentry Ltd. et al. v. HSBC Private Bank Suisse SA et al., case number 1:10-ap-03633, in the U.S. Bankruptcy Court for the Southern District of New York.

The bankruptcy case is In re: Fairfield Sentry Limited et al., case number 1:10-bk-13164, in the U.S. Bankruptcy Court for the Southern District of New York.

–Editing by Covey Son.