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HSBC wins appeals relating to Stanford Ponzi scheme

  • United Kingdom
  • Financial services disputes and investigations
  • Litigation and dispute management

15-04-2021

Following the judgment handed down on 15 April 2021 by the Court of Appeal in the case of Stanford International Bank v HSBC Bank plc [2021] EWCA Civ 535, HSBC Bank plc (“HSBC”) has successfully struck out the majority of the claim brought against it by Stanford International Bank (“SIB”) of approximately £118.5 million. As a consequence the total quantum now potentially recoverable is only £2.4 million. HSBC continues to deny the remaining claim in full. The appeal decision confirms the basis upon which a claim for dishonest assistance can be brought against a corporate entity (rejecting the novel concept of “corporate recklessness”) and also provides helpful guidance on what constitutes a loss in the context of so-called Quincecare claims against financial institutions.

HSBC was represented by Eversheds Sutherland’s Financial Services Disputes team (led on this matter by Partner David Flack and Principal Associate Oliver Shipway) and Counsel from Fountain Court and Essex Court Chambers (Patricia Robertson QC, Louise Hutton QC and Christopher Langley). The case has been identified by The Lawyer as one of its Top 20 Cases for 2021.

The Stanford Ponzi scheme and the claim

The claim was brought in 2019 by Antigua-based Stanford International Bank (“SIB”) in connection with the number of correspondent accounts it held with HSBC in London between 2003 to 2009. In February 2009 the SEC brought charges against Robert Allen Stanford, SIB’s Chairman, for perpetrating a fraud, which involved the sale of Certificates of Deposit (“CDs”) to Stanford’s investors via SIB. At that time this was the second largest Ponzi scheme in history (and in respect of which Robert Allen Stanford, was subsequently imprisoned for 110 years in the US). SIB alleges that HSBC should be liable for its alleged failure to discover the US$5 billion Ponzi fraud before the SEC charges were brought.

SIB advanced two causes of action:

(i)   a negligence claim brought for alleged breach of the Quincecare duty owed by banks/financial institutions not to execute payment instructions when “on enquiry” that the payment in question may be a fraud on their customer (derived from the case of Quincecare v Barclays Bank [1992] 4 All ER 363 and as found on the facts of Singularis Holdings Ltd (In Liquidation) v. Daiwa Capital Markets Europe Ltd [2018] 1 WLR 2777); and

(ii)   alleging that HSBC dishonestly assisted Robert Allen Stanford in carrying out the Ponzi scheme through alleged “corporate recklessness” and/or “blind eye” application of its policies, in particular those relating to Anti-Money Laundering (“AML”) and Know Your Customer (“KYC”) checks, to SIB.

Both claims are denied by HSBC.

Strike-out

HSBC sought an early strike-out of SIB’s dishonest assistance and the majority if its negligence claim in July 2020.

In relation to dishonest assistance, SIB argued that a dishonesty claim could be founded on the basis of HSBC’s alleged “corporate recklessness” in connection with the application of its systems and controls to SIB. However, SIB also acknowledged that no dishonest conduct by an individual within HSBC had been identified. As such, HSBC applied for strike out arguing no valid claim for dishonest assistance had been made out.

In respect of its negligence claim SIB sought recovery of payments made out of its accounts with HSBC from between 1 August 2008 (when it alleged HSBC should at the latest have become aware of the fraud) and 17 February 2009 (when the US Securities and Exchange Commission brought charges against Mr Stanford and the Ponzi scheme became public knowledge). It was common ground that all but £2.4 million of the £118.5 million payments out in this period were either repayments to holders of SIB CDs or to SIB-named accounts held with other banks. HSBC sought to strike out the claim for damages in relation to these payments on the basis that they did not constitute a loss of SIB.

Mr Justice Nugee gave his judgment in July 2020 to: (i) strike out SIB’s dishonest assistance claim; and (ii) dismiss HSBC’s application to strike out the majority of SIB’s loss claim. SIB appealed (i) above (the “Dishonest Assistance Appeal”) and HSBC appealed (ii) (the “Loss Appeal”).

Court of Appeal decision

The Court of Appeal found conclusively in favour of HSBC in respect of both appeals.

In respect of the Loss Appeal, the Court (in the leading judgment by the Master of the Rolls, Sir Geoffrey Vos) reversed the decision of the High Court and struck out £116.1 million of SIB’s negligence claim. The Court held that: (i) the payments by SIB to itself clearly could not amount to a recoverable loss; and (ii) before SIB collapsed into insolvent liquidation on 15 April 2009 the payments to CD holders (who at the point of payment had a valid contractual entitlement to receive the funds) had no effect on SIB’s net asset position as they reduced SIB’s debts by an equivalent amount. The fact that the payments reduced the cash available to SIB once it entered insolvency and therefore the ultimate dividend to its creditors did not affect the outcome, the Court held, since HSBC owed its Quincecare duty to SIB not to its creditors (unlike SIB’s directors). Sir Geoffrey Vos observed that “for these purposes, the true distinction is between a company that is trading and a company in respect of which a winding up process has commenced, not between a solvent trading company and an insolvent trading company”.  

As regards dishonest assistance, the Court upheld the High Court’s decision to strike out the claim. The Court restated the position established by case law that the touchstone for accessory liability for breach of trust and fiduciary duty is the two-stage test for dishonesty (which requires that first, the defendant’s actual state of knowledge should be determined and, second, an objective appraisal of that state of mind should be carried out by reference to whether defendant’s conduct was honest or dishonest according to the standards of ordinary decent people). To impute blind-eye knowledge, amounting to dishonesty, to a defendant requires two conditions to be satisfied: (i) the existence of a suspicion that certain facts may exist, and (ii) a conscious decision to refrain from taking any step to confirm their existence. Finally, to attribute dishonesty to a corporation requires dishonesty or blind-eye knowledge of one or more natural persons. The Court held that no such knowledge was alleged in this case and accordingly struck out the claim.

Commentary and analysis

The Court reiterated the position in Singularis that the Quincecare duty is owed to a bank’s customers, not their customers’ creditors. In so doing, the Court provided welcome clarification about the scope of the Quincecare duty and its effect on the nature of the damages that can (or rather cannot) be sought for an alleged breach.

Further, the Court rejected SIB’s attempt to expand the range of conduct attracting liability for dishonest assistance / accessory liability to breach of trust or fiduciary duty by reference to the concept of “corporate recklessness”. In circumstances where no allegation of dishonesty was made against a natural person within HSBC, it would not be possible to rely on alleged “reckless” application of its policies and procedures to find that HSBC had been dishonest. Although dishonesty could take the form of blind eye knowledge, the Court restated the principle from the House of Lords decision in Manifest Shipping & Co Ltd v. Uni-Polaris Insurance Co Ltd [2003] 1 AC 469 that such knowledge required a targeted suspicion. Conversely, allowing an untargeted or speculative suspicion to be the basis of a finding of dishonestly would be to equate it with gross negligence, which was the wrong approach. Finally, in line with the decisions in Armstrong v. Strain [1952] KB 232 and Greenridge Luton One Ltd v. Kempton Investments Ltd [2016] EWHC 91 (Ch), it was not possible to aggregate two innocent minds to make one dishonest whole. As such, the Court held that SIB’s attempt to circumvent the requirement to identify a dishonest individual within a defendant company in order to found a dishonest assistance claim was misconceived. In doing so, it rejected the suggestion that this is a developing area of the law, which may discourage further similar attempts.

Finally, the Court rejected SIB’s reliance on the recent decision in Sofer v. Swissindependent Trustees SA [2020] EWCA Civ 699 as authority for the proposition that there was no need to identify dishonest conduct by an individual within a company in order to bring a dishonesty claim. In that case it had not been possible to identify the responsible individual but a clear pleading of dishonesty had been made out, which would have been possible to particularise after disclosure; whereas in this case there was no such allegation and SIB argued that it did not in fact need to identify such a dishonest individual in order to bring a dishonest claim. This is a helpful reinforcement that the existing strictures remain in place to ensure that only properly evidenced dishonesty claims should be brought.

HSBC continues to defend the balance of the claim.

A copy of the judgment can be found here.