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To v. HSBC Holdings PLC

United States District Court, S.D. New York

March 1, 2017

HAU YIN TO AND CHENG HYE CHEAH, Plaintiffs,
v.
HSBC HOLDINGS PLC et al., Defendants.

          MEMORANDUM OPINION AND ORDER

          LAURA TAYLOR SWAIN United States District Judge

         Plaintiffs, who were individual foreign investors in Hermes International Fund (“Hermes”), a British Virgin Islands fund that placed its assets with Bernard L. Madoff Investment Securities (“BLMIS”), bring claims against a number of HSBC-affiliated entities (collectively, the “HSBC Defendants”[1] or “Defendants”) and two sub-groupings of those entities (the “HSBC Administrator Defendants, ”[2] and the “HSBC Custodian Defendants”[3]) arising from the various HSBC Defendants' alleged involvement with BLMIS' Ponzi scheme. Plaintiffs bring five claims: (1) breach of fiduciary duty, against the HSBC Administrator and Custodian Defendants; (2) aiding and abetting breach of fiduciary duty, against HSBC Holdings, HSBC Bank, HSBC Bank USA, HSBC Private Bank Holdings, and HSBC Private Bank (Suisse); (3) aiding and abetting fraud, against all the HSBC Defendants; (4) negligent misrepresentation, against the HSBC Administrator Defendants; and (5) unjust enrichment, against all the HSBC Defendants. The Court has subject matter jurisdiction of this action pursuant to 18 U.S.C. § 1334(b).

         The case is now before the Court on the HSBC Defendants' motion to dismiss the Complaint for lack of subject matter jurisdiction, lack of personal jurisdiction, failure to state a claim upon which relief can be granted, and other alleged defects. The Court has reviewed carefully the submissions of the parties. For the following reasons, Defendants' motion to dismiss the Complaint is granted.

         Background

         The circumstances surrounding the collapse of Madoff's Ponzi scheme are well-known; the Court will summarize the Complaint's allegations that are relevant to this motion practice below.

         Hermes International Fund is an open-ended investment company organized under the laws of the British Virgin Islands (“BVI”), which issued several different classes of shares allocated to sub-funds. (Compl. ¶ 49.) Between 2002 and 2008, Plaintiffs purchased millions of dollars of shares of one of those sub-funds, known as the Hermes World Sub-Fund (“Hermes”), which then placed all of Plaintiffs' investments into BLMIS through Hermes' subsidiary, Lagoon, without Plaintiffs' knowledge. (Id. ¶¶ 17, 48-49.) Plaintiffs allege that they suffered individual injury when the Ponzi scheme collapsed because certain BLMIS investors redeemed their investments prior to the revelation of Madoff's Ponzi scheme. (Id. ¶ 53.)

         Plaintiffs allege that the HSBC Defendants played a key role in facilitating the Ponzi scheme by funneling billions of dollars to BLMIS through the so-called “Feeder Funds, ” such as Hermes. (See id. ¶¶ 3, 55.) Plaintiffs allege that Defendants accomplished this by acting as “custodian, administrator, manager and promoter of the many Feeder Funds.” (Id. ¶ 55.) Plaintiffs further allege that, by lending the HSBC name to the funds, the HSBC Defendants convinced Plaintiffs and other investors that the Feeder Funds were a safe place to invest their money. (Id.)

         The HSBC Administrator Defendants served as administrators, registrars, and service agents pursuant to agreements with the Feeder Funds. (Id. ¶ 61.) In this capacity, the HSBC Administrator Defendants, for a fee, were responsible for the day-to-day administration of the funds, which entailed, among other things, issuing and redeeming fund shares, and maintaining books and records of those funds. (Id.) Plaintiffs allege that the HSBC Administrator Defendants committed to providing services beyond those of a typical fund administrator, including being responsible for determining the share price of Hermes, and for maintaining the accounts and financial records of Hermes for the proper conduct of the fund's financial affairs. (Id. ¶ 64.) The HSBC Administrator Defendants allegedly had “discretionary authority” to pay fund expenses, draw on funds to perform fund duties, employ agents, use the name of the fund and sign documents on behalf of the fund. (Id. ¶ 65.) Plaintiffs allege that the HSBC Administrator Defendants were agents of Hermes in its dealings with the public, including sending out to Plaintiffs portfolio summary reports regarding their investment in Hermes. (Id. ¶ 66.) Plaintiffs also allege that, acting in their capacity as fund administrators and sub-administrators, the HSBC Administrator Defendants transmitted directions to BLMIS (located in New York) and received from BLMIS trade confirmations, account statements and other information. (Id. ¶ 31.) The HSBC Administrator Defendants, accordingly to Plaintiffs, communicated with BLMIS in connection with their duties as fund administrators, and transmitted false information provided by BLMIS to customers located around the world, including in the United States. (Id.)

         The HSBC Custodian Defendants entered into custodian agreements with certain of the Feeder Funds, under which they were responsible for maintaining separate accounts, overseeing the administration of the payment and redemption of funds; and otherwise transferring, exchanging or delivering securities as directed by the Feeder Funds. (Id. ¶ 69.) HSBC Bank Bermuda served as custodian to Hermes pursuant to a custodian agreement, and HSSL served as a sub-custodian for Hermes and Lagoon. (Id. ¶ 70.) Plaintiffs allege that, in their capacity as fund custodian and sub-custodians, the HSBC Custodian Defendants directed and transferred hundreds of millions of dollars to and from BLMIS New York. (Id. ¶ 33.) HSBC Bank Bermuda entered into at least one sub-custodian agreement with BLMIS. (Id. ¶ 23.) HSSL entered into at least one sub-custodian agreement with BLMIS. (Id. ¶ 24.)

         Acting in their capacity as payee banks, certain Defendants such as HSBC Bank received and facilitated the transfer of Madoff's criminal proceeds out of BLMIS in New York for the benefit of certain Feeder Funds, and vice versa from the Feeder Funds to BLMIS. (Id. ¶ 35.) Other Defendants, including HSBC Bank and HSBC Bank USA, allegedly increased the flow of funds into Madoff's Ponzi scheme by creating, marketing and selling structured financial products. (Id. ¶ 36.) HSBC Bank USA is domiciled in the United States, and maintains offices and regularly transacts business in New York. (Id. ¶ 37.)

         Defendants move to dismiss the Complaint, arguing lack of subject matter jurisdiction, forum non conveniens, lack of personal jurisdiction over all Defendants other than HSBC Bank USA (“Foreign Defendants”), lack of standing, statute of limitations bar, Securities Litigation Uniform Standards Act, 15 U.S.C. § 78bb (“SLUSA”) bar, and failure to state a claim.

         Discussion

         Subject Matter Jurisdiction

         Section 1334(b) of Title 28 confers on district courts “original but not exclusive jurisdiction of all civil proceedings arising under title 11, or arising in or related to cases under title 11” of the United States Code, which governs bankruptcy cases and related proceedings. 28 U.S.C. § 1334(b). The Securities Investor Protection Act (“SIPA”), under a subsection titled “Jurisdiction and powers of the court, ” provides that the court in which an application for a protective decree under SIPA is filed “shall have the jurisdiction, powers, and duties conferred upon a court of the United States having jurisdiction over cases under Title 11, together with such other jurisdiction, powers, and duties as are prescribed by this chapter.” 15 U.S.C. § 78eee(2)(A)(iii). BLMIS has long been the subject of SIPA proceedings, which are brought under Title 15 of the United States Code; Chapter 7 bankruptcy proceedings under Title 11 were also commenced against Bernard L. Madoff.

         Plaintiffs assert that this Court has subject matter jurisdiction of their action because it is “related” to a case under Title 11, specifically to “[t]he involuntary Chapter 7 petition against Madoff [that] was substantively consolidated with the separate proceeding against BLMIS filed under the Securities Investor Protection Act (“SIPA”), 15 U.S.C. §§78aaa, et seq.” (“BLMIS Consolidated Action”) (Compl. ¶¶ 28-29); see SPV OSUS LTD v. UBS AG, No. 15-CV-619, 2015 WL 4079079, at *1 (S.D.N.Y. Jul. 1, 2015) (“After an involuntary chapter 7 petition was filed against Madoff . . . the United States Bankruptcy Court for the Southern District of New York consolidated the Madoff estate with the previously established BLMIS bankruptcy estate, in which a bankruptcy proceeding against BLMIS had been filed under [SIPA].”) Defendants contend that this Court lacks subject matter jurisdiction because Section 1334(b) only confers “related to” jurisdiction of cases related to Title 11 cases, and the BLMIS Consolidated Action survives only ...


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