The High Court has ruled that an assignment of claims against two HSBC companies, made as part of a scheme to sell shares in a Madoff-related special purpose vehicle, was contrary to Irish public policy and void. It dismissed the proceedings brought by SPV OSUS Limited against the two companies as frivolous and vexatious and bound to fail.
The judgment, delivered by Ms Justice Costello on 5 October 2015, followed a preliminary application by HSBC Institutional Trust Services (Ireland) Limited and HSBC Securities Services (Ireland) Limited. The court considered whether the assignment, insofar as it purported to transfer the right to pursue the claims, amounted to champerty. The parties agreed the court would proceed on the assumption that the third-party claims had been assigned; the assignment’s scope was also being contested in proceedings in New York.
The claims arose from Optimal Strategic US Equity Limited’s investment through Bernard L. Madoff Securities LLC, which collapsed after the fraud came to light in 2008. Optimal Strategic had an allowed customer claim in the US liquidation. It assigned that claim and other rights to SPV in May 2011. Under a wider scheme, investors in the Strategic Series could exchange their interests for SPV shares, which were then sold in three auctions. By May 2013, hedge funds and distressed-debt investors held more than 93% of SPV’s shares.
SPV alleged that HSBC Custodian and HSBC Administrator breached contractual and fiduciary duties, acted negligently and made misrepresentations in connection with services to Optimal Strategic. The claimed damages were about US$2.92 billion, less payments received. Those allegations were not tried in this application; the issue was whether SPV could pursue them on the basis of the assignment.
SPV argued that the third-party claims were ancillary to the allowed claim against the Madoff estate or, alternatively, that it had a genuine commercial interest in enforcing them. The defendants argued the transfer was an assignment of a bare cause of action and part of trading in litigation.
Justice Costello found the third-party claims were not incidental or ancillary to the bankruptcy claim. She also found that SPV had no independent, pre-existing commercial interest in the claims and that the scheme contemplated the sale of interests carrying the litigation rights to investors who had not suffered the original loss. In the court’s view, the transaction amounted to trafficking in litigation and unlawful stirring up of litigation.
The court declared the assignment void and unenforceable as to the right to bring the proceedings against the first and second defendants. It then concluded that SPV had no claim against them independent of the assignment and dismissed the proceedings. The judgment did not determine the underlying allegations of misconduct.