HSBC’s Swiss miss

November 13, 2009

One might think that after Madoff, Stanford and other Ponzi-like schemes, big banks would be more careful about the money managers they do business with — especially people running highly speculative investment opportunities.

But it appears not everyone at the global banking giant HSBC got the message.Consider the case of Dividium Capital, a now-defunct investment fund that was registered in the Isle of Man, an offshore banking haven located in the Irish Sea. Dividium, which operated out of Switzerland, promised investors high double-digit returns from the sale of gold certificates backed by an investment in a Russian gold mine project.

HSBC had been a primary depositary bank for the fund. Some of Dividium’s investors say their money was wired to bank accounts that the fund maintained at an HSBC branch in the Isle of Man.

Dividium billed itself as an “international investment firm, which generates its returns on the basis of ethical principles with the objective of generating the best possible yield for the person and investor,” according to some of its marketing literature.

But Dividium was anything but ethical, according to investors, lawyers and regulators.

Over the summer, Dividium was forced into bankruptcy by Swiss authorities after some of the firm’s estimated 3,000 investors began complaining they weren’t getting updated statements on their accounts and were unable to redeem their money.

Soon after, Spanish authorities arrested a number of Dividium’s promoters after determining that much of the 33 million in euros (about $49 million) the fund raised may have gone missing.

To date, the Dividium story hasn’t received much attention outside of Germany and Spain, where most of the investors live. I couldn’t find a single story about Dividium in an English-language publication or website, even though the firm was registered in the Isle of Man and shared a London mailing address with an accounting firm called Louw & Company.

London-based Risk Reward Ltd, a consulting firm, also did work for Dividium, says a person close to the investment fund.

But that lack of attention may change. Some of Dividium’s investors are looking for another deep-pocketed financial player to be held accountable — and some Dividium investors are considering targeting HSBC.

So far, HSBC has taken a hands-off approach to dealing with the fallout from Dividium’s collapse.

I asked HSBC on a number of occasions to talk about Dividium and the bank’s role in serving as a depositary bank for the investment fund. Each time, an HSBC spokesman said the bank could not comment on client matters. “We are obliged to maintain a duty of confidentiality,” said Paul Harris, a bank spokesman.

This response from HSBC sounds unconvincing. After all, with Swiss regulators liquidating what little is left of Dividium, there really isn’t much of a client to protect.

Equally mum on the topic of Dividium is Risk Reward. A person answering the phone for the risk management firm declined to comment.

Dean Louw, owner of the accounting firm that bears his name, says his company never did any audit work for Dividium. He says all the firm did was collect mail for Dividium — originally called International Invest — and then forward it on to the firm’s offices in Switzerland.

Mark Benedict, an American who sunk money into Dividium a year ago, faults HSBC for not doing adequate due diligence on Dividium’s backers. He also says the bank failed to keep abreast of where the money that investors deposited with Dividium was going.

Benedict says he invested with Dividium in part because he had been led to believe by Dividium’s representations that HSBC had vetted the investment fund and its promoters. HSBC’s “failure to know its customer has directly cost myself and 3,000 other investors upwards of 33 million euros,” he says.

Martin Sach, an attorney with the German law firm Winheller, says his firm represents about 20 investors in Dividium and it too is considering pursuing claims against HSBC.

“A lot of money was transferred to HSBC,” says Sach. “It was their depositary bank. Dividium was not allowed to hold client money for financial supervisory reasons. It’s possible that HSBC is also liable for losses.”

The questions about controls at HSBC comes as the bank appears to be a victim in a separate dubious scheme. Federal prosecutors in New York say that HSBC is one of three giant banks defrauded by financier Hassan Nemazee in an apparent $293 million Ponzi scheme.

Nemazee, a major donor to Democratic political candidates like President Obama, has been indicted on charges that he defrauded HSBC, Citigroup and Bank of America into providing his company with hundreds of millions of dollars in bank loans.

Prosecutors contend that in August, Nemazee drew down $75 million from a $100 million line of credit he had gotten from HSBC to pay off a loan his company had gotten from Citigroup.

In the wake of the indictment, HSBC filed a civil lawsuit against Nemazee claiming it was the victim of “an elaborate scheme to deceive HSBC into believing that its loan was secured by collateral, in the form of United States Treasury Notes, when it was not.”

HSBC long has had a good reputation in financial circles for doing due diligence and sniffing out potential scams. Maybe it’s time to reassess whether that reputation is still warranted.

UPDATE: Maybe it’s just a coincidence, but soon after this column was posted the website for Risk Reward Ltd., a London based consultancy firm was disabled. (Here is a cache version). I’m told Risk Reward did advisory work for Dividium.

CEO Dennis Cox did not respond to an email seeking comment. On Nov. 13, however, I got this comment from Lisette Mermod, Risk Reward’s commercial director: “All of our client relationships are based upon confidentiality which preclude our discussing any matters regarding any client relationships.”

Meanwhile, here’s something interesting about Cox that I didn’t notice before: one of his prior jobs was serving as director of risk management for HSBC Operational Risk Consultancy. Again, it may all just be a coincidence, but I’ll stay on the story.

4 comments

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“On the heels of the global financial crises it’s time for financial institutions, like HSBC, to become totally transparent and to take full responsibility for their involvement in activities that cost taxpayers and investors billions. HSBC willingly participated, endorsed, and profited from a fraudulent investment scheme, and ignored that their customer, International Invest/Dividium, did not have the necessary licenses and registrations from various Financial Regulators and Authorities where their customer was operating in London, Spain, Switzerland and the Isle of Man. HSBC overlooked their due diligence on the founder, Josef Blashchak, aka Josef Hader, who had previously been arrested and convicted of fraud in Germany. HSBC’s greed, negligence, and failure to know their customer has directly cost over 3000 investors worldwide upwards of 33,000,000 Euros.”

Posted by Mark Benedict | Report as abusive

[…] Reuters Columns » Blog Archive » HSBC's Swiss miss | Blogs | But it appears not everyone at the global banking giant HSBC got the message.Consider the case of Dividium Capital, a now-defunct investment fund that was registered in the Isle of Man, an offshore banking haven located in the Irish Sea. .. Continued here: Reuters Columns » Blog Archive » HSBC's Swiss miss | Blogs | […]

Posted by Reuters Columns » Blog Archive » HSBC's Swiss miss | Blogs | « Offshore loans, banks, money | Report as abusive

“HSBC’s greed, negligence, and failure to know their customer has directly cost over 3000 investors worldwide upwards of 33,000,000 Euros.”

Now, come on. Who is not being greedy? The person “investing” in high yield schemes is the one who should not “fail to know.”

The bank can’t see the future if some company deposits megabucks. It’s up to the company’s auditors to Audit it. Was HSBC the auditor?

(I have great sympathy because I got taken for a ride – and probably wouldn’t have if an unrelated accident hadn’t distracted me at a vital moment. But Easy Money always smells, wouldn’t you agree?)

Malcontent

Posted by Malcontent | Report as abusive

This issue is about what HSBC knew, or should have known about their client at the time, not about what they possibly could have known in the future.
In this case, HSBC’s customer International Invest/Dividium was operating as an unauthorized investment scheme without the necessary licenses to do so from the Financial Services Authority where they were operating in London, Isle of Man, Switzerland, and Spain. Having those licenses would have safeguarded investors.
What HSBC’s customer did have, however, is a previous arrest and conviction for fraud, a fact HSBC should have known about and disclosed if they did their due diligence and background checks. Or worse, HSBC did know and chose to ignore it or bury it.

From the position of HSBC, on the other hand, if they ignored the lack of licenses and the previous fraud of their customer and engaged in a business relationship, they must apparently have minimal legal or financial risk for liability as a willing participant of a fraud in direct relation to the profit they would realize from the relationship.
Therefore, HSBC’s greed, negligence, and failure to know their customer has directly cost over 3000 investors worldwide upwards of 33,000,000 Euros.

Posted by Mark Benedict | Report as abusive

I like the zeros Matthew. Are these countries not subject to Basle II and money laundering legislation ? Or am I trying to whistle through Madonna’s front teeth ?

Posted by Casper | Report as abusive