In a blow to HSBC efforts to expand investment banking, HSBC served as a trustee for the investment portion of the business from August 2003 to March 2005, when a federal court shut down Pension Fund at SEC’s behest. HSBC’s name and logo appeared throughout the firm’s marketing materials, which were not properly reviewed, the SEC said.
In its cease-and-desist order, the SEC said that since at least 1999, Pension Fund sold retirement and college “trust plans” that claimed to provide term life insurance to investors and the chance to invest in mutual funds. The company, through 500 independent agents, raised at least $127 million in that time from 3,400 investors.
The marketing materials implied that the trust plans were developed by HSBC and the Pension Fund, and that the money would be “totally safe” in a trust account at HSBC.
Instead, Pension Fund put it into a regular checking account in its name at HSBC. About 95 percent of the money was used to pay high sales commissions, expenses and fees on the insurance and mutual funds, while only 5 percent was invested. The firm also fabricated bank certificates and annual statements, and stole tens of millions of dollars, the SEC said.
The firm and the bank also failed to disclose HSBC’s role, the SEC said. Pension Fund hired HSBC as trustee in August 2003, and the SEC said HSBC “actively participated” in choosing offshore mutual funds with high front-loaded fees that would be offered under a negotiated fee arrangement between the bank and Pension Fund.
In October 2003, an HSBC Private Bank representative wrote a letter on bank letterhead touting the relationship and inviting existing investors to transfer funds to HSBC. Pension Fund sent it to about half of its investors, along with a form with HSBC’s logo on it that listed new mutual fund options.
But the marketing materials didn’t disclose the high fees. And the materials were not forwarded to the bank’s corporate office, legal department or compliance departments for proper review as required under the bank’s policies. Compliance officials did not see any materials until late 2004, when a branch in Brazil obtained copies.
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