Washington, D.C., Sept. 19, 2007 – LAWFUEL – The Legal Newswire – The Securities and Exchange Commission today announced settled enforcement proceedings against HSBC Bank USA, N.A., which will pay a $10 million civil penalty and approximately $500,000 in disgorgement 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), that was directed primarily at Central and South American investors.
“By approving Pension Fund’s use of its name, logo and reputation, among other things, HSBC provided false assurances to investors. This case should serve as an important reminder to banking and financial institutions to guard the credibility they may lend to other companies with which they associate,” said Linda Chatman Thomsen, Director of the SEC’s Division of Enforcement.
David Nelson, Director of the Commission’s Miami Regional Office, added, “This settlement will further assist the victims of Pension Fund’s offering fraud. Our action serves as a reminder that our goal is to protect investors in U.S. markets, regardless of where they reside.”
The Commission issued a settled cease-and-desist Order finding 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.
On March 28, 2005, the SEC filed an emergency action in the U.S. District Court for the Southern District of Florida against Pension Fund and its principals to halt the offering fraud. The Court appointed a receiver over Pension Fund, who shut down its operations, marshaled its assets, and developed a claims process to distribute recovered funds to its investor victims.
The SEC Order filed today finds that 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, and used up to 95 percent of such funds to pay its own undisclosed sales commissions, expenses and fees. Pension Funds’ marketing brochures provided a list of mutual funds offered as part of the trust plans, but did not disclose any information about the sales commissions, administrative expenses, or the front-load mutual fund fees charged to investors. The SEC Order finds, among other things, that HSBC failed to follow its own internal procedures in reviewing and approving certain Pension Fund offering materials.
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.
The SEC Order directs HSBC to cease and desist from violating Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933. Simultaneous with the issuance of the Order, the SEC also filed a settled civil action in which HSBC agreed to pay a total of approximately $10.5 million, which will be paid into a Fair Fund for the benefit of investors injured in the Pension Fund offering fraud.
The SEC previously settled civil injunctive actions against Pension Fund’s principals. See LR-20147 (June 7, 2007).