HSBC Alleged to Have Ignored Signs of Fraud
(CN) - HSBC bank was sued Monday for $250 million, accused of ignoring signs that David Elias was committing fraud through an investment vehicle he controlled.
In a complaint filed in Federal Court in Manhattan, the liquidator for Luxembourg-based SLS Capital SA, says HSBC was a custodian of life insurances polices used as collateral for bonds that SLS sold to investors, and that it ultimately proved these bonds were falsely marketed as safe.
The liquidator, Yann Baden, claims SLS Capital SA failed in 2009, largely because of Elias' fraudulent activities. Elias reportedly died later the same year.
Prior to its collapse, one of SLS Capital's specialties was being a player in something known as the Life Settlement business. Companies engaged in these trades buy life insurance policies of older policyholders, and then collect the death benefits when these individuals die.
As explained in the lawsuit, "the sooner the insureds die, the faster the business recoups its investment. If people live longer than expected, the expected returns are delayed."
In the industry securities backed by such policies are known as death bonds.
In his lawsuit, liquidator Baden says SLS Capital began selling these bonds in 2005, with investors either buying them directly through the company or through another entity, Keydata Investment Services, which sold bonds securitized by SLS.
Keydata also failed in 2009.
"As respects the current action, Elias orchestrated a fraudulent scheme which raised over $250 million from mostly private investors, many of whom had modest means, who bought bonds issued by SLS," Baden says. "The bonds were secured by a portfolio of life insurance policies acquired in the secondary market from the original insureds. Elias, aided and abetted by others, aggressively marketed the bonds as conservative investments. They turned out to be anything but."
Baden claims that when SLS ran into cash-flow problems in the midst of the global financial crisis "Elias and others took actions which deceived the investors and improperly postponed a default on the bonds while they siphoned off the investors' collateral."
"The pilfered funds were used to invest in other far riskier ventures unrelated to SLS and to support Elias' lavish lifestyle, complete with corporate jets, luxury yachts, and island resorts," Baden says.
He contends that HSBC "allowed investors to believe incorrectly that HSBC was acting as trustee for their benefit, and yet the bank ignored multiple 'red flags' that should have led it to investigate suspicious activity at SLS."
"HSBC's failure to conduct such an inquiry enabled Elias and others to cover up their massive ongoing fraud until it was too late," Baden says.
Among these signs were the fact Keydata identified HSBC as the US trustee for SLS Capital's bonds, when in fact, in played no such role. HSBC demanded Keydata "clarify" the literature it provided to prospective investors, but took no further action, the lawsuit says.
Baden also contends HSBC ignored the explicit warnings of a UK financial advisor, who warned "that 'the entire structure presented by Kay Data [sic] looks like a Ponzi scheme.'"
"Acting only in its own interest, HSBC chose instead to try to terminate its agreements with SLS," he says.
But Baden says HSBC's role in the scheme didn't end there. He claims the bank assisted Elias in the diversion of more that $11.3 million of SLS's funds into an unauthorized investment in Amazonian Rainforest land, and then "turned a blind eye" to held a "fire sale" of SLS's entire portfolio of policies.
"Simply Justice demands that HSBC be called to account for its role in [Elias'] fraud," the lawsuit said.
Baden seeks compensatory, punitive and exemplary damages on multiple claims that HSBC aided and abetted fraud, aided and abetted breach of fiduciary duty, breach of duty of inquiry, negligence, and breach of contract.
The plaintiff is represented by Michael L. Cohen, of Cohen & Buckley LLP in Baltimore, Md., and Alex Spizz, of Spizz, Cohen & Serchuk, P.C. in New York.
Elias was reportedly declared dead after a bout of Pneumonia in May 2009, and his ashes were purportedly scattered in the Malaysian ran forest on Borneo. However, at least some believe he faked his death and is still on the run in Southeast Asia.