HSBC can be sued over worthless 'minibonds'

Lehman Brothers Holdings Inc. and HSBC Holdings Plc may be sued over $1.6 billion in worthless securities sold to retail investors, primarily in Hong Kong, a judge in New York ruled.

Locally, HSBC has Northern American operations in Mettawa.

U.S. District Judge William H. Pauley III yesterday reversed part of a decision by Lehman's bankruptcy judge, who threw out a suit by seven holders of structured financial notes called minibonds. The plaintiffs seek to represent a class of investors in the notes from June 16, 2003, to Sept. 15, 2008, Pauley said in his decision.

Pacific International Finance Ltd. issued the minibonds and marketed them as linked to the credit of financially sound companies and backed by AAA-rated collateral, Pauley said. The minibonds became worthless as a result of the collapse of Lehman Brothers, which filed the biggest bankruptcy in U.S. history in September 2008.

A Hong Kong regulatory authority investigation disclosed that Lehman designed the minibonds program and used Pacific Finance to issue them, Pauley said. Lehman selected HSBC Bank USA as trustee of the collateral securing the notes, Pauley said, citing testimony in the Hong Kong proceeding.

In two orders, issued in November and December, U.S. Bankruptcy Judge James Peck ruled that the plaintiffs lacked standing to sue and that any attempt to revise their complaint would be futile.

In yesterday's ruling, Pauley reversed the dismissal of one count against HSBC and Lehman and permitted the plaintiffs to amend two dismissed counts.

Neil Brazil, an HSBC spokesman, said the firm had no immediate comment on the ruling. Kimberly Macleod, a Lehman spokeswoman, didn't return a voice-mail message seeking comment.

The case is Wong v. HSBC USA Inc., 10-cv-00017, U.S. District Court, Southern District of New York (Manhattan).