HSBC Secures Appellate Victory in Madoff-Related Litigation

On January 28, 2016, Cleary Gottlieb secured a reversal of the June 30, 2015 decision and order by the New York State Supreme Court Commercial Division’s decision, which denied in part HSBC’s motion to dismiss a complaint that challenged the Bank’s decision to freeze assets in plaintiffs’ accounts given the litigation risk arising from claims brought by the liquidator for Fairfield Sentry, a hedge fund that invested nearly all of its assets with Bernard L. Madoff Investment Securities. The plaintiffs invested hundreds of thousands of dollars in Fairfield and redeemed those investments at a profit shortly before Bernie Madoff’s historic Ponzi scheme was discovered, sending Fairfield into liquidation and prompting it to seek the return of redemption payments made to its investors. The complaint asserted a variety of state law claims and alleged that the Bank’s account freeze was not contractually authorized and that the Bank deceived or otherwise failed to warn plaintiffs that it might freeze their accounts.

The Commercial Division granted the Bank’s motion to dismiss plaintiffs’ tort and statutory claims, but denied the Bank’s motion to dismiss as to plaintiffs’ claims for breach of contract and breach of the implied covenant of good faith and fair dealing, finding that the terms of the contract governing plaintiffs’ account did not permit the Bank to freeze customer accounts.

On appeal, the Appellate Division, First Department unanimously reversed the Commercial Division’s partial denial of HSBC’s motion to dismiss and upheld the Commercial Division’s dismissal of plaintiffs’ tort and statutory claims. The Court held that the Bank’s decision to freeze customer accounts was authorized by various contractual provisions that allow it “to protect itself from legal actions commenced in relation to the securities it had held on plaintiffs’ behalf.”