In re Herald, Primeo and Thema Funds Securities Litigation

Filing 288

DECLARATION of Evan A. Davis, dated July 11, 2011 re: #234 MOTION to Approve Approval of Partial Settlement.. Document filed by HSBC Bank USA, N.A., as a proposed defendant, HSBC Holdings plc, HSBC Institutional Trust Services (Ireland) Ltd., HSBC Securities Services (Ireland) Ltd.. (Attachments: #1 Certificate of Service)(Davis, Evan)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK

IN RE HERALD, PRIMBO AND THEMA
FUNDS SECURITIES LITIGATION

ECF Case
Case No. 09 Civ. 0298 (RMB)

This documents relates to:
Case No. 09 Civ. 2558 (RMB)
NEVILLE SEYMOUR DAVIS,
Plaintiff,
VS.
ALBERTO BENBAS SAT, STtPHANE
BENBAS SAT, GENEVALOR, BENBAS SAT &
CIE, GERALD J.P. BRADY, JOHN
HOLLIWELL, SONJA KOHN, DANIEL
MORRIS SEY, PETER SCHEITHAUER, DAVID
T. SMITH, WERNER TRIPOLT, BANK MEDICI
AG, UNICREDIT SPA, HSBC INSTITUTIONAL
TRUST SERVICES (IRELAND) LTD., HSBC
SECURITIES SERVICES (IRELAND) LTD.,
HSBC BANK USA, N.A., HSBC HOLDINGS
PLC, PRICEWATERHOUSECOOPERS
INTERNATIONAL LTD.,
PRICE WATERHOUSECOOPERS (DUBLIN),
PRICE WATERHOUSECOOPERS LLP,
PRICE WATERHOUSECOOPERS BERMUDA,
THEMA ASSET MANAGEMENT LIMITED,
THEMA INTERNATIONAL FUND PLC, BA
WORLDWIDE FUND MANAGEMENT
LIMITED, PETER MADOFF, ANDREW
MADOFF, THE ESTATE OF MARK MADOFF,
WILLIAM FRY, JP MORGAN CHASE & CO.,
and THE BANK OF NEW YORK MELLON
Defendants.

DECLARATION OF
EVAN A. DAVIS

I, Evan A. Davis, declare under penalty of perjury as follows:
1.

I am a member of the bar of this Court and a partner at Cleary Gottlieb Steen &

Hamilton LLP, counsel for the HSBC Defendants. I submit this declaration in support of the
HSBC Defendants' Reply to Objections to Preliminary Approval of Partial Settlement.
2.

In the Reply Memorandum that the LISBC Defendants have submitted to the

Court they make the statement that they have good defenses, including ongoing and appropriate
diligence. That diligence included two KPMG reviews of fraud and operational risks at Bernard
L. Madoff Investment Securities ("BLMIS") that HSBC commissioned. In support of the
statement as to ongoing and appropriate diligence, I wish to call the Court's attention to
pleadings that indicate how the United States Department of Justice and the United States
Securities and Exchange Commission believe those KPMG reviews were foiled through the use
of forged documents.
3.

In particular, I wish to call the Court's attention to the allegations of the

Department of Justice and the S.E.C. in three charging pleadings; (1) the Information filed
August 11, 2009, and available at http://wwxvjustice.gov/usao/nys/depascali.html, charging
Frank DiPascali, Jr., the manager of accounts involved in the Madoff fraud, with falsifying books
and records, securities fraud and perjury (the "Information"); (2) the Indictment filed November
17, 2010, and available at http://wwwjustice.gov/usao/nys/oharaperez.html, charging BLMIS 's
Director of Operations Daniel Bonventre, programmers and other personnel at BLMIS with
falsifying books and records and securities fraud (the "Indictment"); and (3) the Complaint filed
by the S.E.C. on February 26, 2010, and available at www.sec.gov/litigation/complaints/2010
/comp21424.pdf, charging Bonventre with securities fraud and fraud on the clients of BLMIS
(the "Complaint").

4.

All three of these pleadings describe the preparation of forged DTC reports. DTC

stands for the Depository Trust Company, a U.S. entity independent of BLMIS to which
BLMIS's books and records could be compared for independent confirmation of the existence of
assets and the actual occurrence of transactions. As described in the Information and the
Indictment, these forged reports were prepared to show to a "European Accounting Firm" that
conducted reviews in 2005 and 2008 for a "European Custodian" that served as custodian for
certain "European Clients" of BLMIS. Indictment T 44, Information

26. Upon information

and belief, the European Accounting Firm was KPMG, the European Custodian was HSBC, and
the European Clients of BLMIS included Thema.
5.

The Information charges that in 2005 DiPascali oversaw the creation of

counterfeit DTC reports to deceive the European Accounting Firm. It is alleged that these
counterfeit reports purported to show "that BLMIS had custody of the securities reflected on the
account statements that had been sent to the European Clients and/or the European Custodian."
26. It also alleges that when the European Accounting Firm returned in 2008 to review BLMIS
operations related to the European Custodian and the European Clients, DiPascali caused
additional false and fraudulent documents to be created and provided to the European
Accounting Firm "to persuade the European Accounting Firm that the securities positions
reflected on the European Custodian's account statements actually existed when, in fact, they did

not."

29.
6.

The Indictment provides a detailed description of the steps taken to prepare these

forged DTC reports. It explains that BLMIS computers were directly connected to DTC through
password access and allowed generation of DTC reports for BLMIS's market making and
proprietary accounts that could be compared to BLMIS's books and records.

70. The

Indictment fuirther explains that one of the indicted BLMIS programmers created a program
(DTC 17EOM) designed to generate a monthly report that looked like the reports previously
produced by DTC for BLMIS's market making and proprietary accounts, but which added the
purported but non-existent holdings of BLMIS clients such as Themna. This new program
permitted an operator to pull the DTC report for a given month using the backup tape for that
month that contained the reports for the BLMJS market making and proprietary accounts and to
add the positions in the purported but also fabricated stock records for BLMJS customers such as
Themna. This program enabled a BLMIS computer operator to print fraudulent DTC reports that
reflected the combined data. T 71. These false and fraudulent DTC reports were intended to be
shown to representatives of the European Accounting Firm who visited BLMIS. T 72.
7.

The Complaint in addition makes clear that the forged DTC reports that purported

to reflect fictional balances maintained in investor accounts were reviewed in detail by
Bonventre and Bernard Madoff himself, "so the reports would appear to be as legitimate as
possible." It notes that fake DTC reports were found next to real DTC reports in Bonventre's
file.

79.

Executed on July 11, 2011, at New York, New York.

GLRRYGOTT'LIEB STEEN & HAMILTON

Evan A. Davis