HSBC Holdings' proposed $62.5mn settlement with investors in an Irish fund that lost money in Bernie Madoff's Ponzi scheme was rejected in Federal Court.   A U.S. District Judge, Richard Berman, however rejected it as not being "fair, reasonable or adequate - even at this preliminary stage" to investors in Thema International Fund Plc.

HSB, which was sued in January 2009, said it had acted as a custodian to the fund and provided administration and other services, learned that its offer was rejected by Judge Berman because the accord had several "obvious deficiencies."   These included inadequate disclosure of legal costs, and the setting aside of a $10 million "reserve" for legal fees and expenses for investors to pursue claims against non-settling defendants outside the U.S..  The judge said he would consider a revised accord, and "generally favors the voluntary settlement of matters before it, including the settlement of purported class actions."

 HSBC in June estimated that Thema investors lost about $312 million. It also said various funds it serviced transferred a net $4.3 billion to Madoff's firm during the period it serviced those funds.  Madoff trustee Irving Picard accused HSBC in a separate lawsuit of ignoring "red flags" about Madoff's fraud.  That said, a different federal judge, Jed Rakoff, in July voided about $6.6 billion of Picard's claims against HSBC, saying the trustee lacked authority to bring them.

The case is In re: Herald, Primeo, and Thema Securities Litigation, U.S. District Court, Southern District of New York, No. 09-00289.   [Reuters, 9/7/11]