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Univ. of Toledo College of Law

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Friday, October 12, 2007

HSBC Bank Settles SEC Fraud Charges

The SEC announced judicial approval of its settlement of its action against HSBC Bank USA, N.A. ("HSBC"), imposing a $10 million penalty and ordering HSBC to pay disgorgement in the amount of $463,893, with prejudgment interest of $36,667, for allowing its name and logo to be used in connection with a Florida-based offering fraud by Pension Fund of America, L.C. (Pension Fund). The SEC alleged that from August 2003 to March 2005, HSBC served as trustee for the investment component of Pension Fund and its affiliated entities' trust plans. Since at least 1999, Pension Fund sold retirement and college "trust plans" that purportedly provided term life insurance and the opportunity to invest in one or more pre-selected mutual funds. However, Pension Fund failed to disclose, among other things, that it was taking up to 95 percent of the investors' funds to pay commissions and fees. Pension Fund raised at least $127 million from more than 3,400 investors, primarily from Central and South America. In 2005, the SEC filed an emergency action against Pension Fund and its principals to halt the offering fraud. According to the SEC's Complaint, HSBC allowed the use of its name and logo in Pension Fund's offering materials. HSBC also allowed Pension Fund to use marketing materials that falsely suggested that the trust plans were co-developed by HSBC and Pension Fund, and that investors' funds would be "totally safe" because the money would be deposited in a trust account at HSBC. In reality, Pension Fund deposited investors' funds in an ordinary checking account in its name at HSBC. Additionally, HSBC actively participated in the selection of offshore, high front-load mutual funds to be offered to prospective investors under a negotiated fee arrangement between HSBC and Pension Fund. However, neither the amount of the funds' sales loads, nor HSBC's role in the funds' selection, were disclosed to investors. In October 2003, shortly after HSBC became trustee for Pension Fund's plans, HSBC drafted a letter on its own letterhead announcing the new relationship and inviting certain of Pension Fund's existing investors to transfer their funds to HSBC. Pension Fund sent the letter to approximately half of its existing investors, and enclosed a form bearing HSBC's logo that listed new mutual fund selections available upon transfer to HSBC. Neither the letter nor the enclosure disclosed that investors would incur new front-load fees in connection with such transfers, or the amounts of those prospective costs.

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