In re HSBC Bank USA

UNITED STATES OF AMERICA 
Before the 
SECURITIES AND EXCHANGE COMMISSION 
SECURITIES ACT OF 1933  
Release No. 8844 / September 19, 2007  
  
ADMINISTRATIVE PROCEEDING  
File No. 3-12809  
  
  
In the Matter of  
  
 HSBC Bank USA, N.A.,  
  
 
ORDER INSTITUTING CEASE-AND-
DESIST PROCEEDINGS, MAKING 
FINDINGS, AND IMPOSING A 
CEASE-AND-DESIST ORDER 
PURSUANT TO SECTION 8A OF THE 
SECURITIES ACT OF 1933 
 
Respondent. 
 
  
I. 
The  Securities  and  Exchange  Commission  (“Commission”)  deems  it  appropriate  that  
cease-and-desist  proceedings  be,  and  hereby  are,  instituted  pursuant  to  Section  8A  of  the  
Securities  Act  of  1933  (“Securities  Act”),  against  HSBC  Bank  USA,  N.A.  (“HSBC”  or  
“Respondent”). 
II. 
In anticipation of the institution of these proceedings, Respondent has submitted an Offer 
of  Settlement  (the  “Offer”)  which  the  Commission  has  determined  to  accept.  Solely  for  the  
purpose  of  these  proceedings  and  any  other  proceedings  brought  by  or  on  behalf  of  the  
Commission,  or  to  which  the  Commission  is  a  party,  and  without  admitting  or  denying  the  
findings herein, except as to the Commission’s jurisdiction over it and the subject matter of these 
proceedings,  which  are  admitted,  Respondent  consents  to  the  entry  of  this  Order  Instituting  
Cease-and-Desist  Proceedings,  Making  Findings,  and  Imposing  a  Cease-and-Desist  Order  
Pursuant to Section 8A of the Securities Act of 1933 (“Order”), as set forth below. 
 
 
 
 

III. 
On the basis of this Order and Respondent’s Offer, the Commission finds
1
 that: 
Summary 
1. This  action  concerns  the  role  of  a  financial  institution  in  a  Miami,  Florida  based  
offering  fraud.  Since  at  least  1999,  Pension  Fund  of  America,  L.C.  and  PFA  Assurance  Group,  
Ltd. (hereinafter collectively “Pension Fund”) had offered and sold retirement and college “trust 
plans” that purportedly provided investors with term life insurance and the opportunity to invest 
in  one  or  more  of  several  pre-selected  mutual funds. In August 2003, HSBC agreed to serve as 
trustee of the investment component of Pension Fund’s trust plans.  HSBC also agreed to allow 
Pension  Fund  to  use  its  name  and  logo  in  Pension  Fund’s  offering  materials.  HSBC  allowed  
Pension Fund to use marketing materials that falsely suggested to prospective investors that the 
trust  plans  were  co-developed  by  HSBC  and  Pension  Fund,  that  their  funds  would  be  “totally  
safe,”  because  the  investor’s  money  would  be  deposited  into  a  trust  account  at  HSBC.    One  of  
HSBC’s representatives drafted a letter on HSBC letterhead announcing the new relationship and 
inviting certain of Pension Fund’s existing investors to transfer their funds to HSBC.   In reality, 
Pension Fund deposited investors’ funds into an ordinary checking account in its name at HSBC, 
with  Pension  Fund  taking  up  to  95%  of  the  investment  amount  to  pay  expenses  and  fees.  
Additionally, because of HSBC’s negotiated fee arrangement with Pension Fund, HSBC actively 
participated  in  the  selection  of  offshore,  high  front  load  mutual  funds  offered  to  prospective  
investors. Neither the amount of these sales loads, nor HSBC’s role in the funds’ selection, were 
disclosed  to  investors.  As  a  result,  from  August  2003  through  March  28,  2005,  HSBC  caused  
Pension Fund’s violations of Section 17(a)(2) and 17(a)(3) of the Securities Act. 
Respondent 
2. HSBC  is  a  national  banking  association  with  its  principal  place  of  business  in  
Wilmington, Delaware. HSBC operates in nine states in the United States. HSBC is the principal 
subsidiary of HSBC USA Inc., which has certain publicly-traded preferred shares that are listed 
on  the  New  York  Stock  Exchange.  HSBC  USA  Inc.  is  an  indirect,  wholly-owned  subsidiary  of  
HSBC  North  America  Holdings,  Inc.,  which,  in  turn,  is  a  wholly-owned  indirect  subsidiary  of  
HSBC  Holdings,  plc  (“HSBC  Holdings”),  a  public  limited  company  organized  in  the  United  
Kingdom.  HSBC  Holdings’  ordinary  shares  are  admitted  to  trading  on  the  London  Stock  
Exchange and are listed on The Stock Exchange of Hong Kong, Euronext Paris and the Bermuda 
Stock Exchange and its American depository shares are listed on the New York Stock Exchange. 
Other Relevant Entity 
3. Pension Fund of America, L.C. is a Florida limited liability corporation formed in 
June  1999,  with  its  principal  place  of  business  in  Coral  Gables,  Florida.  Pension  Fund  is  not  
registered with the Commission in any capacity. Pension Fund offered unregistered securities in 
the  form  of  retirement  and  college  “trust  plans”  that  purported  to  have  an  investment  and  
insurance  component.  On  March  28,  2005,  the  United  States  District  Court  for  the  Southern  
                                                
 
1
    The  findings  herein  are  made  pursuant  to  Respondent's  Offer  of  Settlement  and  are  not  binding  on  any  
other person or entity in this or any other proceeding. 
2 

District  of  Florida  appointed  a  receiver  over  Pension  Fund  and  its  affiliated  entities  in  an  
emergency action filed by the Commission to halt Pension Fund’s offering fraud. 
Securities and 
Exchange  Commission  v.  Pension  Fund  of  America,  L.C.,  et  al.,  Case  No.  05-20863-CIV-
MOORE (S.D. Fla.). 
Pension Fund’s Fraudulent Offering 
4. From  at  least  1999  through  March  28,  2005  (“the  Relevant  Period”),  Pension  
Fund  and  its  principals  offered  and  sold  “trust  plans”  that  purported  to  contain  both  an  
investment  component  and  an  insurance  component.  Using  a  network  of  over  500  independent  
sales agents, Pension Fund marketed the trust plans to individuals who primarily lived in Central 
and  South  America.  Through  sales  materials  and  oral  presentations,  Pension  Fund  promoted  its  
plans as safe and profitable because the investors could choose mutual funds issued by U.S. fund 
companies,  and  U.S.  banks  and  broker-dealers  would  purportedly  serve  as  “trustees”  or  
“custodians,” assuring the safety of their funds. During the Relevant Period, Pension Fund raised 
at least $127 million from over 3,400 investors. 
5. Pension  Fund  offered  two  types  of  trust  plans:  a  monthly  or  annual  contribution  
plan  (“Liberty  Plan”),  and  a  one-time  contribution  plan  (“Capital  Plan”).  The  majority  of  the  
investors  chose  to  invest  in  the  Liberty  Plan,  which  required  annual  contributions  of  between  
$1,000 and $20,000 a year for a period of 10 to 15 years. The Capital Plan required a minimum 
one-time  contribution  of  at  least  $10,000  for  a  minimum  10-year  term.  Both  plans  imposed  
significant   early   withdrawal   penalties   for   the   entire   term   of   the   plan.   The   “investment   
component”  of  both  plans  provided  investors  with  a  choice  of  several  different  mutual  funds  
issued by well-known U.S. fund companies. The plans also included a fixed term life insurance 
component. 
6. Throughout the Relevant Period, several U.S. banks and broker-dealers served as 
a trustee and/or custodian in connection with the investment component of Pension Fund’s trust 
plans.  Pension  Fund  touted  its  relationships  with  these  institutions  as  one  of  the  main  selling  
points  for  its  trust  plans  and  included  information  about  these  companies  in  presentations  and  
marketing materials provided to prospective investors.  Pension  Fund  represented  to  prospective  
investors  that  by  investing  through  their  plans,  the  U.S.  bank  or  broker-dealer  would  act  as  
“trustee”  for  the  investor.  The  fact  that  the  investment  vehicle  was  a  “trust”  was  important  to  
prospective  investors  living  in  South  and  Central  America  because  it  purportedly  assured  them  
that their money was safe. 
7. In  connection  with  its  offer  and  sale  of  the  trust  plans,  Pension  Fund  made  
material misrepresentations and omissions to investors. Among other things, Pension Fund failed 
to disclose to Liberty Plan investors that during the first year of the investment up to 95% of their 
funds  were  used  to  pay  exorbitant  commissions  to  sales  agents,  administrative  fees,  and  other  
costs.  Pension  Fund  charged  Capital  Plan  investors  undisclosed,  average  fees  of  30%  on  their  
investments. In addition, Pension Fund falsely told investors that their investments would be held 
“in  trust”  by  the  U.S.  bank  or  broker-dealer  servicing  Pension  Fund’s  trust  plans  at  the  time.  
However, with one exception, none of the institutions executed trust agreements directly with the 
investors.  Pension  Fund  forged  certificates  ostensibly  issued  by  the  financial  institutions,  and  
lulled  investors  with  annual  statements  depicting  false  returns.  Pension  Fund’s  principals  also  
misappropriated tens of millions of investors’ funds. 
3 

HSBC Becomes Trustee of Pension Fund’s Trust Plans and Approves 
Certain Language in Pension Fund’s Offering Materials
 
8. In   the   spring   of   2003,   Pension   Fund   approached   HSBC   Private   Bank   
representatives  (the  “relationship  representatives”)  to  discuss  whether  HSBC  could  serve  as  
trustee for the investment component of its trust plans. Pension Fund’s principals  explained  the  
nature  of  the  trust  plans,  and  told  the  relationship  representatives  they  were  looking  for  a  new  
bank to serve as Pension Fund’s trustee and provide recordkeeping services for its plans. As part 
of the new relationship, Pension Fund would seek approval from certain of its plan participants 
to  liquidate  the  mutual  fund  investments  held  by  other  banks  and  broker-dealers  previously  
affiliated  with  the  plans,  and  transfer  those  proceeds  to  HSBC  for  investment.  Pension  Fund  
requested HSBC’s assistance in  selecting off-shore mutual funds similar to the domestic funds 
Pension Fund previously had been offering to its investors through the trust plans.  Pension Fund 
agreed that HSBC could keep all loads paid by the funds in connection with those transactions. 
The  Pension  Fund  principals  also  requested  the  use  of  HSBC’s  logo  and  name  in  its  revised  
offering materials. 
9. In  evaluating  whether  to  accept  Pension  Fund  as  a  client,  HSBC  obtained  
information  about  Pension  Fund  and  its  principals.  One  of  the  relationship  representatives  
conducted  internet  searches  for  press  releases  and  news  articles  about  Pension  Fund.  Pension  
Fund’s principals provided HSBC with photo identification, information about their personal net 
worth,  and  the  approximate  net  asset  value  of  investor  shares  and  amount  of  funds  that  HSBC  
would receive if it accepted the new relationship.  
10. The relationship representatives also conducted an on-site visit of Pension Fund to 
verify  the  business’  existence  and  learn  about  Pension  Fund’s  operations.  In  addition,  because  
HSBC  was  not  going  to  have  direct  contact  with  the  Pension  Fund  investors,  the  relationship  
representatives   obtained   information   regarding   Pension   Fund’s   “Know   Your   Customer”   
procedures. Pension Fund also sent HSBC its unaudited financial statements for the year ended 
December  31,  2002,  which  indicated  that  while  Pension  Fund  had  recognized  $14.2  million  in  
gross revenues for that year, $5.2 and $6.0 million of those funds were expenses for sales agents’ 
commissions and distributions to Pension Fund’s principals, respectively. 
11. In  August  2003,  HSBC  agreed  to  accept  Pension  Fund  as  a  new  customer  and  
serve  as  trustee  for  the  investment  component  of  the  Pension  Fund  trust  plans.    On  August  7,  
2003, Pension Fund and HSBC executed a Master Trust Agreement, which defined the terms and 
scope  of  HSBC’s  duties  as  trustee.  Specifically,  under  the  Master  Trust  Agreement,  HSBC  
would  serve  as  trustee  for  the  investment  component  of  the  Pension  Fund  plans  and  create  a  
Master  Trust  Account  to  hold  the  assets  designated  by  Pension  Fund  as  the  investment  
component  of  the  investors’  trust  plans.  The  Master  Trust  Agreement,  printed  only  in  English,  
also  indicated  that  HSBC’s  duties  were  limited  to  acting  as  custodian  of  the  investment  
component of the plan, receiving investor funds, retaining custody of those funds in sub-accounts 
and  investing  or  disbursing  investor  funds  as  directed  by  Pension  Fund.  The  Master  Trust  
Agreement  gave  Pension  Fund  the  right  to  use  HSBC’s  name  and  logo  in  Pension  Fund’s  
marketing  materials.  Pension  Fund  prepared  new  offering  materials  purportedly  reflecting  the  
new  relationship  with  HSBC,  and  provided  the  offering  materials  to  HSBC  for  its  review  and  
approval.  The  offering  materials  included  two  contracts  titled  “Guide  to  Plan  Provisions”  and  
“Plan Transfer Provisions” (collectively “Plan Provisions”), and two glossy marketing brochures. 
4 

12. The  marketing  brochures,  printed  in  both  Spanish  and  Portuguese,  contained  a  
general  overview  of  Pension  Fund’s  plans  and  included  HSBC’s  logo,  pictures  of  HSBC’s  
corporate  headquarters,  and  other  general  information  about  HSBC.  The  brochure  stated  that  
HSBC  was  the  “second  largest  commercial  bank  in  the  world.”  In  addition,  the  marketing  
brochures represented that: “Pension Fund and HSBC Bank, USA have created the Liberty Trust 
Plan  for  you.”  The  brochures  further  assured  investors  of  the  safety  of  their  funds,  describing  
HSBC as the investors’ trustee and claiming, “Your money is in the best hands – HSBC Bank, 
USA.” The marketing brochures provided a list of mutual funds offered as part of the trust plans. 
Pension  Fund’s  marketing  brochures  did  not  disclose  information  about  the  sales  commissions,  
administrative  expenses,  or  the  front  load  mutual  fund  fees  charged  to  the  investor.  These  
marketing  brochures  also  did  not  include  information  about  any  limitations  to  HSBC’s  role  as  
trustee. 
13. The  Plan  Provisions  provided  more  details  about  the  trust  plans’  investment  and  
insurance components, and included HSBC’s logo and the legend “HSBC Bank USA as Trustee” 
on  the  cover  page.  The  Plan  Provisions  defined  “Trustee”  as  “HSBC  Bank  USA,  which  shall  
serve as trustee for the Investment Component of the Plan in accordance with the provisions of 
the  Master  Trust  Agreement.”  The  Plan  Provisions  generally  disclosed  that  up  to  80%  of  the  
investor’s  initial  contribution  in  the  Liberty  Plan  would  be  used  to  pay  “plan  expenses,”  which  
were  generally  defined  as  the  cost  of  insurance,  the  fees  associated  with  purchasing  the  mutual  
funds selected by the investor, sales commissions and brokerage fees, and other “administrative 
fees.”  The  Plan  Provisions  did  not  provide  a  specific  breakdown  of  the  nature  and  specific  
amount  of  all  the  fees  and  costs  associated  with  the  plans,  nor  did  it  disclose  that  up  to  50%  
would be used to pay commissions to sales agents. 
14. During  the  Relevant  Period,  HSBC  had  procedures  in  place  providing  for  the  
review  of  any  materials  using  the  HSBC  name  or  logo.  Those  procedures  required  that  the  
relationship  representatives  forward  the  Pension  Fund  marketing  materials  to  the  marketing  
department  for  its  review  of  the  size,  placement,  and  color  of  the  HSBC  logo.  The  procedures  
also  required  the  relationship  representatives  and/or  the  marketing  personnel  to  forward  the  
materials  to  the  compliance  and  legal  departments  for  a  substantive  review  of  the  language  in  
those materials. Finally, the procedures further required that any materials considered to be “co-
branding” (i.e., jointly offered or sold by HSBC and another entity), be sent to the Group Head 
Office  and  Group  Marketing  Office  (“Group  Offices”),  located  at  HSBC’s  parent  company,  
HSBC Holdings, in London, England. Given the language in the marketing brochures suggesting 
that  the  trust  plans  were  “created”  by  Pension  Fund  and  HSBC,  had  these  procedures  been  
followed, the compliance and legal departments would presumably have reviewed the materials 
to  determine  whether  the  co-branding  procedures  were  triggered  or,  in  the  alternative,  whether  
the language of the brochures should have been modified to make clear that the trust plans were 
not jointly offered by Pension Fund and HSBC. 
15. When reviewing Pension Fund’s new marketing materials, HSBC failed to follow 
its  own  internal  marketing  approval  procedures.  Although  the  relationship  representatives  
forwarded   the   marketing   brochures   to   the   marketing   department   for   review,   neither   the   
relationship  representatives  nor  the  marketing  department  forwarded  the  materials  to  the  
compliance and legal departments, or Group Offices, for a substantive review of the language in 
the marketing materials. While HSBC did send the Master Trust Agreement and Plan Provisions 
5 

to  outside  legal  counsel  for  review,  neither  of  the  marketing  brochures  were  reviewed  by  
HSBC’s compliance and legal departments, or outside counsel, for the purpose of assessing the 
adequacy of the representations and disclosures in those materials. 
16. HSBC  administered  its  duties  as  trustee  within  its  Retirement  Financial  Services  
(“RFS”)  group  of  HSBC’s  Private  Bank.  The  Pension  Fund  trust  plans  were  not  the  typical  
retirement  plans  serviced  by  HSBC’s  RFS  group,  which  primarily  serviced  U.S.  employer-
sponsored  retirement  plans,  where  the  member  employees  reside  in  the  U.S.  and  have  direct  
access to HSBC’s services. In contrast, Pension Fund’s investors were not employees of Pension 
Fund, they were not U.S. residents, and they did not have direct contact with or access to HSBC 
or its services. Pension Fund’s investors did not have access to HSBC’s Website, Infoline or Call 
Center,  and  HSBC  instructed  its  staff  to  direct  all  inquiries  from  Pension  Fund’s  investors  to  
Pension Fund. 
17. After the execution of the Master Trust Agreement, HSBC discussed with Pension 
Fund  using  off-shore  mutual  funds,  because  Pension  Fund  represented  to  HSBC  and  the  
marketing brochures expressly stated that the trust plans could not be sold in the U.S. and were 
not available to U.S. citizens or residents.  Pension Fund agreed, stating that its only requirement 
was  that  the  funds  have  name  recognition  and  that  the  available  selection  included  a  variety  of  
funds.    HSBC  identified  a  variety  of  off-shore  mutual  funds  similar  to  the  domestic  funds  
Pension  Fund  previously  had  been  offering.    Since  Pension  Fund  had  agreed  that  HSBC  could  
keep  any  of  the  fees  paid  by  the  mutual  funds  in  connection  with  the  trust  plans,  one  of  the  
significant factors considered by the relationship representative was the amount of front load fees 
paid  by  the  mutual  funds  selected.    HSBC  created  a  Master  Trust  Account  to  hold  the  mutual  
fund  shares  purchased  on  behalf  of  Pension  Fund  investors.  The  mutual  fund  selections  were  
included  in  the  investor  application  provided  to  prospective  investors  with  the  revised  offering  
materials. 
18. Pension   Fund   distributed   the   revised   offering   materials   to   its   prospective   
investors,  and  instructed  certain  investors  to  make  their  contribution  checks  payable  to  HSBC.  
Pension  Fund  remitted  the  checks  for  deposit  to  a  “Gross  Premium”  account  in  the  name  of  
Pension Fund, which essentially functioned as a checking account. Pension Fund then provided 
weekly  transmittal  reports  to  HSBC  that  instructed  HSBC  as  to  how  much  to  invest  in  each  of  
the mutual funds selected, and how much should remain in the “Gross Premium” account (or be 
transferred  to  another  Pension  Fund  account)  in  the  form  of  “fees.”  During  the  relevant  period,  
the  weekly  transmittal  reports  revealed  that  in  certain  instances,  Pension  Fund  directed  only  a  
minimal portion of its investors’ funds be invested in mutual funds, in some cases allocating as 
much  as  95%  of  the  investor’s  contribution  to  “fees”  to  remain  in  Pension  Fund’s  “Gross  
Premium” account. 
19. In October 2003, one of the relationship representatives drafted a letter on HSBC 
letterhead  announcing  the  new  relationship  between  HSBC  and  Pension  Fund,  and  inviting  
certain  of  Pension  Fund’s  existing  investors  to  transfer  their  funds  from  other  financial  
institutions to HSBC. Pension Fund sent the letter to approximately half of its existing investors, 
and enclosed a form with the HSBC logo that listed the new mutual fund selections available to 
investors upon transfer to HSBC. Neither the letter nor the enclosure informed investors that they 
would  incur  new  front  load  fees  in  connection  with  that  transfer,  or  the  amounts  of  those  
prospective costs. 
6 

20. In  February  2004,  HSBC  learned  that  some  of  the  mutual  fund  companies  were  
not charging Pension Fund’s investors the full front load fees they had negotiated with Pension 
Fund. HSBC asked the mutual fund companies to rebook the trades and charge the higher front 
load fees for the Pension Fund investors.  In return, some of the mutual fund companies required 
HSBC to provide them with hold-harmless letters. HSBC did not disclose the rebooking of these 
fees to Pension Fund’s investors. 
21. During 2004, one of the relationship representatives traveled to Central and South 
America four times at Pension Fund’s request to meet with sales agents.  Pension Fund asked the 
relationship  representative  to  attend  these  meetings  to  add  credibility  to  Pension  Fund  and  its  
relationship  with  HSBC.  Some  investors  attended  at  least  one  of  these  meetings.    At  these  
meetings, the relationship representative discussed HSBC’s relationship with Pension Fund and, 
in  one  of  these  meetings,  used  a  power-point  presentation  to  describe  different  banking  and  
investment services offered by HSBC.   
22. In July 2004, certain of the relationship representatives first learned about a civil 
action  brought  against  Pension  Fund  by  the  Guatemalan  military  pension  fund,  Instituto  De  
Prevision  Militar  and  Inverma  S.A.  (“IPM”),  from  an  article  in  Prensa  Libre,  a  Guatemalan  
newspaper.    
Instituto  De  Prevision  Militar  and  Iverma  S.A.  v.  Pension  Fund  of  America,  et  al.  
Case No. 020730 CA 27 (Fla. Cir. Ct.) (“IPM civil action”).  The newspaper reported that IPM 
had  filed  a  suit  in  Florida  state  court  in  November  2002,  alleging  that  Pension  Fund  had  
defrauded the Guatemalan military pension fund, and that its principals had misappropriated $24 
million  of  pensioners’  funds.  These  relationship  representatives  met  with  Pension  Fund’s  
principals  and  Pension  Fund’s  outside  counsel  to  discuss  IPM’s  allegations,  and  were  told  the  
allegations were “without merit.” HSBC accepted this representation. 
23. In September 2004, HSBC Holdings informed the relationship representatives that 
an  HSBC  branch  office  in  Brazil  had  obtained  copies  of  the  Pension  Fund  marketing  materials  
from  an  unaffiliated  sales  agent  whose  client  was  interested  in  investing  in  the  trust  plans.  
Among other things, the HSBC branch office in Brazil was concerned that the predominance of 
HSBC  in  the  marketing  brochure  incorrectly  implied  that  HSBC  sponsored  the  trust  plans.  
Thereafter,  HSBC’s  compliance  department,  for  the  first  time,  reviewed  Pension  Fund’s  
marketing  brochures  and  the  power  point  presentation  used  in  Latin  America.  The  compliance  
department  made  some  changes  to  the  marketing  brochures  and  the  power  point  presentation.    
The  compliance  department  did  not,  however,  forward  the  marketing  brochures  or  other  
materials to HSBC’s legal department. Moreover, although HSBC’s compliance department did 
not  complete  its  review  of  Pension  Fund’s  marketing  brochures  until  December  2004,  HSBC  
allowed  Pension  Fund  to  continue  to  use  its  marketing  brochures  in  all  of  its  sales  territories  
except Brazil. 
24. From   August   2003   through   March   28,   2005,   HSBC   earned   trust   and   
recordkeeping  fees  from  Pension  Fund,  and  fees  paid  by  mutual  fund  companies  in  connection  
with investors’ mutual fund transactions. 
 
 
7 

Violations 
25. As  a  result  of  the  conduct  described  above,  HSBC  caused  Pension  Fund’s  
violations  of  Sections  17(a)(2)  and  17(a)(3)  of  the  Securities  Act.      A  violation  of  these  
provisions  may  be  established  by  a  showing  of  negligence.      Aaron  v.  SEC,  448  U.S.  680,  697  
(1980).   
IV. 
In  view  of  the  foregoing,  the  Commission  deems  it  appropriate  to  impose  the  sanctions  
agreed to in Respondent HSBC’s Offer. 
Accordingly,  it  is  hereby  ORDERED  that  Respondent  HSBC  cease  and  desist  from  
committing  or  causing  any  violations  and  future  violations  of  Sections  17(a)(2)  and  17(a)(3)  of  
the Securities Act. 
By the Commission. 
 Nancy M. Morris 
                                                                                Secretary                                                                                
 
 
8 

UNITED STATES OF AMERICA 
Before the 

SECURITIES AND EXCHANGE COMMISSION 

SECURITIES ACT OF 1933  
Release No. 8844 / September 19, 2007  
  
ADMINISTRATIVE PROCEEDING  
File No. 3-12809  
  
  
In the Matter of  
  
 HSBC Bank USA, N.A.,  
  

 

ORDER INSTITUTING CEASE-AND-
DESIST PROCEEDINGS, MAKING 
FINDINGS, AND IMPOSING A 
CEASE-AND-DESIST ORDER 
PURSUANT TO SECTION 8A OF THE 
SECURITIES ACT OF 1933 

 

Respondent. 

 
  

I. 

The Securities and Exchange Commission (“Commission”) deems it appropriate that 
cease-and-desist proceedings be, and hereby are, instituted pursuant to Section 8A of the 
Securities Act of 1933 (“Securities Act”), against HSBC Bank USA, N.A. (“HSBC” or 
“Respondent”). 

II. 

In anticipation of the institution of these proceedings, Respondent has submitted an Offer 
of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the 
purpose of these proceedings and any other proceedings brought by or on behalf of the 
Commission, or to which the Commission is a party, and without admitting or denying the 
findings herein, except as to the Commission’s jurisdiction over it and the subject matter of these 
proceedings, which are admitted, Respondent consents to the entry of this Order Instituting 
Cease-and-Desist Proceedings, Making Findings, and Imposing a Cease-and-Desist Order 
Pursuant to Section 8A of the Securities Act of 1933 (“Order”), as set forth below. 

 

 

 

 



III. 

On the basis of this Order and Respondent’s Offer, the Commission finds1 that: 

Summary 

1. This action concerns the role of a financial institution in a Miami, Florida based 
offering fraud. Since at least 1999, Pension Fund of America, L.C. and PFA Assurance Group, 
Ltd. (hereinafter collectively “Pension Fund”) had offered and sold retirement and college “trust 
plans” that purportedly provided investors with term life insurance and the opportunity to invest 
in one or more of several pre-selected mutual funds. In August 2003, HSBC agreed to serve as 
trustee of the investment component of Pension Fund’s trust plans.  HSBC also agreed to allow 
Pension Fund to use its name and logo in Pension Fund’s offering materials. HSBC allowed 
Pension Fund to use marketing materials that falsely suggested to prospective investors that the 
trust plans were co-developed by HSBC and Pension Fund, that their funds would be “totally 
safe,” because the investor’s money would be deposited into a trust account at HSBC.  One of 
HSBC’s representatives drafted a letter on HSBC letterhead announcing the new relationship and 
inviting certain of Pension Fund’s existing investors to transfer their funds to HSBC.   In reality, 
Pension Fund deposited investors’ funds into an ordinary checking account in its name at HSBC, 
with Pension Fund taking up to 95% of the investment amount to pay expenses and fees. 
Additionally, because of HSBC’s negotiated fee arrangement with Pension Fund, HSBC actively 
participated in the selection of offshore, high front load mutual funds offered to prospective 
investors. Neither the amount of these sales loads, nor HSBC’s role in the funds’ selection, were 
disclosed to investors. As a result, from August 2003 through March 28, 2005, HSBC caused 
Pension Fund’s violations of Section 17(a)(2) and 17(a)(3) of the Securities Act. 

Respondent 

2. HSBC is a national banking association with its principal place of business in 
Wilmington, Delaware. HSBC operates in nine states in the United States. HSBC is the principal 
subsidiary of HSBC USA Inc., which has certain publicly-traded preferred shares that are listed 
on the New York Stock Exchange. HSBC USA Inc. is an indirect, wholly-owned subsidiary of 
HSBC North America Holdings, Inc., which, in turn, is a wholly-owned indirect subsidiary of 
HSBC Holdings, plc (“HSBC Holdings”), a public limited company organized in the United 
Kingdom. HSBC Holdings’ ordinary shares are admitted to trading on the London Stock 
Exchange and are listed on The Stock Exchange of Hong Kong, Euronext Paris and the Bermuda 
Stock Exchange and its American depository shares are listed on the New York Stock Exchange. 

Other Relevant Entity 

3. Pension Fund of America, L.C. is a Florida limited liability corporation formed in 
June 1999, with its principal place of business in Coral Gables, Florida. Pension Fund is not 
registered with the Commission in any capacity. Pension Fund offered unregistered securities in 
the form of retirement and college “trust plans” that purported to have an investment and 
insurance component. On March 28, 2005, the United States District Court for the Southern 
                                                 
1  The findings herein are made pursuant to Respondent's Offer of Settlement and are not binding on any 

other person or entity in this or any other proceeding. 

2 



District of Florida appointed a receiver over Pension Fund and its affiliated entities in an 
emergency action filed by the Commission to halt Pension Fund’s offering fraud. Securities and 
Exchange Commission v. Pension Fund of America, L.C., et al., Case No. 05-20863-CIV-
MOORE (S.D. Fla.). 

Pension Fund’s Fraudulent Offering 

4. From at least 1999 through March 28, 2005 (“the Relevant Period”), Pension 
Fund and its principals offered and sold “trust plans” that purported to contain both an 
investment component and an insurance component. Using a network of over 500 independent 
sales agents, Pension Fund marketed the trust plans to individuals who primarily lived in Central 
and South America. Through sales materials and oral presentations, Pension Fund promoted its 
plans as safe and profitable because the investors could choose mutual funds issued by U.S. fund 
companies, and U.S. banks and broker-dealers would purportedly serve as “trustees” or 
“custodians,” assuring the safety of their funds. During the Relevant Period, Pension Fund raised 
at least $127 million from over 3,400 investors. 

5. Pension Fund offered two types of trust plans: a monthly or annual contribution 
plan (“Liberty Plan”), and a one-time contribution plan (“Capital Plan”). The majority of the 
investors chose to invest in the Liberty Plan, which required annual contributions of between 
$1,000 and $20,000 a year for a period of 10 to 15 years. The Capital Plan required a minimum 
one-time contribution of at least $10,000 for a minimum 10-year term. Both plans imposed 
significant early withdrawal penalties for the entire term of the plan. The “investment 
component” of both plans provided investors with a choice of several different mutual funds 
issued by well-known U.S. fund companies. The plans also included a fixed term life insurance 
component. 

6. Throughout the Relevant Period, several U.S. banks and broker-dealers served as 
a trustee and/or custodian in connection with the investment component of Pension Fund’s trust 
plans. Pension Fund touted its relationships with these institutions as one of the main selling 
points for its trust plans and included information about these companies in presentations and 
marketing materials provided to prospective investors. Pension Fund represented to prospective 
investors that by investing through their plans, the U.S. bank or broker-dealer would act as 
“trustee” for the investor. The fact that the investment vehicle was a “trust” was important to 
prospective investors living in South and Central America because it purportedly assured them 
that their money was safe. 

7. In connection with its offer and sale of the trust plans, Pension Fund made 
material misrepresentations and omissions to investors. Among other things, Pension Fund failed 
to disclose to Liberty Plan investors that during the first year of the investment up to 95% of their 
funds were used to pay exorbitant commissions to sales agents, administrative fees, and other 
costs. Pension Fund charged Capital Plan investors undisclosed, average fees of 30% on their 
investments. In addition, Pension Fund falsely told investors that their investments would be held 
“in trust” by the U.S. bank or broker-dealer servicing Pension Fund’s trust plans at the time. 
However, with one exception, none of the institutions executed trust agreements directly with the 
investors. Pension Fund forged certificates ostensibly issued by the financial institutions, and 
lulled investors with annual statements depicting false returns. Pension Fund’s principals also 
misappropriated tens of millions of investors’ funds. 

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HSBC Becomes Trustee of Pension Fund’s Trust Plans and Approves 
Certain Language in Pension Fund’s Offering Materials 

8. In the spring of 2003, Pension Fund approached HSBC Private Bank 
representatives (the “relationship representatives”) to discuss whether HSBC could serve as 
trustee for the investment component of its trust plans. Pension Fund’s principals explained the 
nature of the trust plans, and told the relationship representatives they were looking for a new 
bank to serve as Pension Fund’s trustee and provide recordkeeping services for its plans. As part 
of the new relationship, Pension Fund would seek approval from certain of its plan participants 
to liquidate the mutual fund investments held by other banks and broker-dealers previously 
affiliated with the plans, and transfer those proceeds to HSBC for investment. Pension Fund 
requested HSBC’s assistance in  selecting off-shore mutual funds similar to the domestic funds 
Pension Fund previously had been offering to its investors through the trust plans.  Pension Fund 
agreed that HSBC could keep all loads paid by the funds in connection with those transactions. 
The Pension Fund principals also requested the use of HSBC’s logo and name in its revised 
offering materials. 

9. In evaluating whether to accept Pension Fund as a client, HSBC obtained 
information about Pension Fund and its principals. One of the relationship representatives 
conducted internet searches for press releases and news articles about Pension Fund. Pension 
Fund’s principals provided HSBC with photo identification, information about their personal net 
worth, and the approximate net asset value of investor shares and amount of funds that HSBC 
would receive if it accepted the new relationship.  

10. The relationship representatives also conducted an on-site visit of Pension Fund to 
verify the business’ existence and learn about Pension Fund’s operations. In addition, because 
HSBC was not going to have direct contact with the Pension Fund investors, the relationship 
representatives obtained information regarding Pension Fund’s “Know Your Customer” 
procedures. Pension Fund also sent HSBC its unaudited financial statements for the year ended 
December 31, 2002, which indicated that while Pension Fund had recognized $14.2 million in 
gross revenues for that year, $5.2 and $6.0 million of those funds were expenses for sales agents’ 
commissions and distributions to Pension Fund’s principals, respectively. 

11. In August 2003, HSBC agreed to accept Pension Fund as a new customer and 
serve as trustee for the investment component of the Pension Fund trust plans.  On August 7, 
2003, Pension Fund and HSBC executed a Master Trust Agreement, which defined the terms and 
scope of HSBC’s duties as trustee. Specifically, under the Master Trust Agreement, HSBC 
would serve as trustee for the investment component of the Pension Fund plans and create a 
Master Trust Account to hold the assets designated by Pension Fund as the investment 
component of the investors’ trust plans. The Master Trust Agreement, printed only in English, 
also indicated that HSBC’s duties were limited to acting as custodian of the investment 
component of the plan, receiving investor funds, retaining custody of those funds in sub-accounts 
and investing or disbursing investor funds as directed by Pension Fund. The Master Trust 
Agreement gave Pension Fund the right to use HSBC’s name and logo in Pension Fund’s 
marketing materials. Pension Fund prepared new offering materials purportedly reflecting the 
new relationship with HSBC, and provided the offering materials to HSBC for its review and 
approval. The offering materials included two contracts titled “Guide to Plan Provisions” and 
“Plan Transfer Provisions” (collectively “Plan Provisions”), and two glossy marketing brochures. 

4 



12. The marketing brochures, printed in both Spanish and Portuguese, contained a 
general overview of Pension Fund’s plans and included HSBC’s logo, pictures of HSBC’s 
corporate headquarters, and other general information about HSBC. The brochure stated that 
HSBC was the “second largest commercial bank in the world.” In addition, the marketing 
brochures represented that: “Pension Fund and HSBC Bank, USA have created the Liberty Trust 
Plan for you.” The brochures further assured investors of the safety of their funds, describing 
HSBC as the investors’ trustee and claiming, “Your money is in the best hands – HSBC Bank, 
USA.” The marketing brochures provided a list of mutual funds offered as part of the trust plans. 
Pension Fund’s marketing brochures did not disclose information about the sales commissions, 
administrative expenses, or the front load mutual fund fees charged to the investor. These 
marketing brochures also did not include information about any limitations to HSBC’s role as 
trustee. 

13. The Plan Provisions provided more details about the trust plans’ investment and 
insurance components, and included HSBC’s logo and the legend “HSBC Bank USA as Trustee” 
on the cover page. The Plan Provisions defined “Trustee” as “HSBC Bank USA, which shall 
serve as trustee for the Investment Component of the Plan in accordance with the provisions of 
the Master Trust Agreement.” The Plan Provisions generally disclosed that up to 80% of the 
investor’s initial contribution in the Liberty Plan would be used to pay “plan expenses,” which 
were generally defined as the cost of insurance, the fees associated with purchasing the mutual 
funds selected by the investor, sales commissions and brokerage fees, and other “administrative 
fees.” The Plan Provisions did not provide a specific breakdown of the nature and specific 
amount of all the fees and costs associated with the plans, nor did it disclose that up to 50% 
would be used to pay commissions to sales agents. 

14. During the Relevant Period, HSBC had procedures in place providing for the 
review of any materials using the HSBC name or logo. Those procedures required that the 
relationship representatives forward the Pension Fund marketing materials to the marketing 
department for its review of the size, placement, and color of the HSBC logo. The procedures 
also required the relationship representatives and/or the marketing personnel to forward the 
materials to the compliance and legal departments for a substantive review of the language in 
those materials. Finally, the procedures further required that any materials considered to be “co-
branding” (i.e., jointly offered or sold by HSBC and another entity), be sent to the Group Head 
Office and Group Marketing Office (“Group Offices”), located at HSBC’s parent company, 
HSBC Holdings, in London, England. Given the language in the marketing brochures suggesting 
that the trust plans were “created” by Pension Fund and HSBC, had these procedures been 
followed, the compliance and legal departments would presumably have reviewed the materials 
to determine whether the co-branding procedures were triggered or, in the alternative, whether 
the language of the brochures should have been modified to make clear that the trust plans were 
not jointly offered by Pension Fund and HSBC. 

15. When reviewing Pension Fund’s new marketing materials, HSBC failed to follow 
its own internal marketing approval procedures. Although the relationship representatives 
forwarded the marketing brochures to the marketing department for review, neither the 
relationship representatives nor the marketing department forwarded the materials to the 
compliance and legal departments, or Group Offices, for a substantive review of the language in 
the marketing materials. While HSBC did send the Master Trust Agreement and Plan Provisions 

5 



to outside legal counsel for review, neither of the marketing brochures were reviewed by 
HSBC’s compliance and legal departments, or outside counsel, for the purpose of assessing the 
adequacy of the representations and disclosures in those materials. 

16. HSBC administered its duties as trustee within its Retirement Financial Services 
(“RFS”) group of HSBC’s Private Bank. The Pension Fund trust plans were not the typical 
retirement plans serviced by HSBC’s RFS group, which primarily serviced U.S. employer-
sponsored retirement plans, where the member employees reside in the U.S. and have direct 
access to HSBC’s services. In contrast, Pension Fund’s investors were not employees of Pension 
Fund, they were not U.S. residents, and they did not have direct contact with or access to HSBC 
or its services. Pension Fund’s investors did not have access to HSBC’s Website, Infoline or Call 
Center, and HSBC instructed its staff to direct all inquiries from Pension Fund’s investors to 
Pension Fund. 

17. After the execution of the Master Trust Agreement, HSBC discussed with Pension 
Fund using off-shore mutual funds, because Pension Fund represented to HSBC and the 
marketing brochures expressly stated that the trust plans could not be sold in the U.S. and were 
not available to U.S. citizens or residents.  Pension Fund agreed, stating that its only requirement 
was that the funds have name recognition and that the available selection included a variety of 
funds.  HSBC identified a variety of off-shore mutual funds similar to the domestic funds 
Pension Fund previously had been offering.  Since Pension Fund had agreed that HSBC could 
keep any of the fees paid by the mutual funds in connection with the trust plans, one of the 
significant factors considered by the relationship representative was the amount of front load fees 
paid by the mutual funds selected.  HSBC created a Master Trust Account to hold the mutual 
fund shares purchased on behalf of Pension Fund investors. The mutual fund selections were 
included in the investor application provided to prospective investors with the revised offering 
materials. 

18. Pension Fund distributed the revised offering materials to its prospective 
investors, and instructed certain investors to make their contribution checks payable to HSBC. 
Pension Fund remitted the checks for deposit to a “Gross Premium” account in the name of 
Pension Fund, which essentially functioned as a checking account. Pension Fund then provided 
weekly transmittal reports to HSBC that instructed HSBC as to how much to invest in each of 
the mutual funds selected, and how much should remain in the “Gross Premium” account (or be 
transferred to another Pension Fund account) in the form of “fees.” During the relevant period, 
the weekly transmittal reports revealed that in certain instances, Pension Fund directed only a 
minimal portion of its investors’ funds be invested in mutual funds, in some cases allocating as 
much as 95% of the investor’s contribution to “fees” to remain in Pension Fund’s “Gross 
Premium” account. 

19. In October 2003, one of the relationship representatives drafted a letter on HSBC 
letterhead announcing the new relationship between HSBC and Pension Fund, and inviting 
certain of Pension Fund’s existing investors to transfer their funds from other financial 
institutions to HSBC. Pension Fund sent the letter to approximately half of its existing investors, 
and enclosed a form with the HSBC logo that listed the new mutual fund selections available to 
investors upon transfer to HSBC. Neither the letter nor the enclosure informed investors that they 
would incur new front load fees in connection with that transfer, or the amounts of those 
prospective costs. 

6 



20. In February 2004, HSBC learned that some of the mutual fund companies were 
not charging Pension Fund’s investors the full front load fees they had negotiated with Pension 
Fund. HSBC asked the mutual fund companies to rebook the trades and charge the higher front 
load fees for the Pension Fund investors.  In return, some of the mutual fund companies required 
HSBC to provide them with hold-harmless letters. HSBC did not disclose the rebooking of these 
fees to Pension Fund’s investors. 

21. During 2004, one of the relationship representatives traveled to Central and South 
America four times at Pension Fund’s request to meet with sales agents.  Pension Fund asked the 
relationship representative to attend these meetings to add credibility to Pension Fund and its 
relationship with HSBC. Some investors attended at least one of these meetings.  At these 
meetings, the relationship representative discussed HSBC’s relationship with Pension Fund and, 
in one of these meetings, used a power-point presentation to describe different banking and 
investment services offered by HSBC.   

22. In July 2004, certain of the relationship representatives first learned about a civil 
action brought against Pension Fund by the Guatemalan military pension fund, Instituto De 
Prevision Militar and Inverma S.A. (“IPM”), from an article in Prensa Libre, a Guatemalan 
newspaper.  Instituto De Prevision Militar and Iverma S.A. v. Pension Fund of America, et al. 
Case No. 020730 CA 27 (Fla. Cir. Ct.) (“IPM civil action”).  The newspaper reported that IPM 
had filed a suit in Florida state court in November 2002, alleging that Pension Fund had 
defrauded the Guatemalan military pension fund, and that its principals had misappropriated $24 
million of pensioners’ funds. These relationship representatives met with Pension Fund’s 
principals and Pension Fund’s outside counsel to discuss IPM’s allegations, and were told the 
allegations were “without merit.” HSBC accepted this representation. 

23. In September 2004, HSBC Holdings informed the relationship representatives that 
an HSBC branch office in Brazil had obtained copies of the Pension Fund marketing materials 
from an unaffiliated sales agent whose client was interested in investing in the trust plans. 
Among other things, the HSBC branch office in Brazil was concerned that the predominance of 
HSBC in the marketing brochure incorrectly implied that HSBC sponsored the trust plans. 
Thereafter, HSBC’s compliance department, for the first time, reviewed Pension Fund’s 
marketing brochures and the power point presentation used in Latin America. The compliance 
department made some changes to the marketing brochures and the power point presentation.  
The compliance department did not, however, forward the marketing brochures or other 
materials to HSBC’s legal department. Moreover, although HSBC’s compliance department did 
not complete its review of Pension Fund’s marketing brochures until December 2004, HSBC 
allowed Pension Fund to continue to use its marketing brochures in all of its sales territories 
except Brazil. 

24. From August 2003 through March 28, 2005, HSBC earned trust and 
recordkeeping fees from Pension Fund, and fees paid by mutual fund companies in connection 
with investors’ mutual fund transactions. 

 

 

7 



Violations 

25. As a result of the conduct described above, HSBC caused Pension Fund’s 
violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act.   A violation of these 
provisions may be established by a showing of negligence.   Aaron v. SEC, 448 U.S. 680, 697 
(1980).   

IV. 

In view of the foregoing, the Commission deems it appropriate to impose the sanctions 
agreed to in Respondent HSBC’s Offer. 

Accordingly, it is hereby ORDERED that Respondent HSBC cease and desist from 
committing or causing any violations and future violations of Sections 17(a)(2) and 17(a)(3) of 
the Securities Act. 

By the Commission. 

 Nancy M. Morris 
 Secretary 
 

 

8 


	I.  
	II.  
	III.  
	1. This action concerns the role of a financial institution in a Miami, Florida based offering fraud. Since at least 1999, Pension Fund of America, L.C. and PFA Assurance Group, Ltd. (hereinafter collectively “Pension Fund”) had offered and sold retirement and college “trust plans” that purportedly provided investors with term life insurance and the opportunity to invest in one or more of several pre-selected mutual funds. In August 2003, HSBC agreed to serve as trustee of the investment component of Pension Fund’s trust plans.  HSBC also agreed to allow Pension Fund to use its name and logo in Pension Fund’s offering materials. HSBC allowed Pension Fund to use marketing materials that falsely suggested to prospective investors that the trust plans were co-developed by HSBC and Pension Fund, that their funds would be “totally safe,” because the investor’s money would be deposited into a trust account at HSBC.  One of HSBC’s representatives drafted a letter on HSBC letterhead announcing the new relationship and inviting certain of Pension Fund’s existing investors to transfer their funds to HSBC.   In reality, Pension Fund deposited investors’ funds into an ordinary checking account in its name at HSBC, with Pension Fund taking up to 95% of the investment amount to pay expenses and fees. Additionally, because of HSBC’s negotiated fee arrangement with Pension Fund, HSBC actively participated in the selection of offshore, high front load mutual funds offered to prospective investors. Neither the amount of these sales loads, nor HSBC’s role in the funds’ selection, were disclosed to investors. As a result, from August 2003 through March 28, 2005, HSBC caused Pension Fund’s violations of Section 17(a)(2) and 17(a)(3) of the Securities Act. 
	2. HSBC is a national banking association with its principal place of business in Wilmington, Delaware. HSBC operates in nine states in the United States. HSBC is the principal subsidiary of HSBC USA Inc., which has certain publicly-traded preferred shares that are listed on the New York Stock Exchange. HSBC USA Inc. is an indirect, wholly-owned subsidiary of HSBC North America Holdings, Inc., which, in turn, is a wholly-owned indirect subsidiary of HSBC Holdings, plc (“HSBC Holdings”), a public limited company organized in the United Kingdom. HSBC Holdings’ ordinary shares are admitted to trading on the London Stock Exchange and are listed on The Stock Exchange of Hong Kong, Euronext Paris and the Bermuda Stock Exchange and its American depository shares are listed on the New York Stock Exchange. 
	3. Pension Fund of America, L.C. is a Florida limited liability corporation formed in June 1999, with its principal place of business in Coral Gables, Florida. Pension Fund is not registered with the Commission in any capacity. Pension Fund offered unregistered securities in the form of retirement and college “trust plans” that purported to have an investment and insurance component. On March 28, 2005, the United States District Court for the Southern District of Florida appointed a receiver over Pension Fund and its affiliated entities in an emergency action filed by the Commission to halt Pension Fund’s offering fraud. Securities and Exchange Commission v. Pension Fund of America, L.C., et al., Case No. 05-20863-CIV-MOORE (S.D. Fla.). 
	4. From at least 1999 through March 28, 2005 (“the Relevant Period”), Pension Fund and its principals offered and sold “trust plans” that purported to contain both an investment component and an insurance component. Using a network of over 500 independent sales agents, Pension Fund marketed the trust plans to individuals who primarily lived in Central and South America. Through sales materials and oral presentations, Pension Fund promoted its plans as safe and profitable because the investors could choose mutual funds issued by U.S. fund companies, and U.S. banks and broker-dealers would purportedly serve as “trustees” or “custodians,” assuring the safety of their funds. During the Relevant Period, Pension Fund raised at least $127 million from over 3,400 investors. 
	5. Pension Fund offered two types of trust plans: a monthly or annual contribution plan (“Liberty Plan”), and a one-time contribution plan (“Capital Plan”). The majority of the investors chose to invest in the Liberty Plan, which required annual contributions of between $1,000 and $20,000 a year for a period of 10 to 15 years. The Capital Plan required a minimum one-time contribution of at least $10,000 for a minimum 10-year term. Both plans imposed significant early withdrawal penalties for the entire term of the plan. The “investment component” of both plans provided investors with a choice of several different mutual funds issued by well-known U.S. fund companies. The plans also included a fixed term life insurance component. 
	6. Throughout the Relevant Period, several U.S. banks and broker-dealers served as a trustee and/or custodian in connection with the investment component of Pension Fund’s trust plans. Pension Fund touted its relationships with these institutions as one of the main selling points for its trust plans and included information about these companies in presentations and marketing materials provided to prospective investors. Pension Fund represented to prospective investors that by investing through their plans, the U.S. bank or broker-dealer would act as “trustee” for the investor. The fact that the investment vehicle was a “trust” was important to prospective investors living in South and Central America because it purportedly assured them that their money was safe. 
	7. In connection with its offer and sale of the trust plans, Pension Fund made material misrepresentations and omissions to investors. Among other things, Pension Fund failed to disclose to Liberty Plan investors that during the first year of the investment up to 95% of their funds were used to pay exorbitant commissions to sales agents, administrative fees, and other costs. Pension Fund charged Capital Plan investors undisclosed, average fees of 30% on their investments. In addition, Pension Fund falsely told investors that their investments would be held “in trust” by the U.S. bank or broker-dealer servicing Pension Fund’s trust plans at the time. However, with one exception, none of the institutions executed trust agreements directly with the investors. Pension Fund forged certificates ostensibly issued by the financial institutions, and lulled investors with annual statements depicting false returns. Pension Fund’s principals also misappropriated tens of millions of investors’ funds. 
	8. In the spring of 2003, Pension Fund approached HSBC Private Bank representatives (the “relationship representatives”) to discuss whether HSBC could serve as trustee for the investment component of its trust plans. Pension Fund’s principals explained the nature of the trust plans, and told the relationship representatives they were looking for a new bank to serve as Pension Fund’s trustee and provide recordkeeping services for its plans. As part of the new relationship, Pension Fund would seek approval from certain of its plan participants to liquidate the mutual fund investments held by other banks and broker-dealers previously affiliated with the plans, and transfer those proceeds to HSBC for investment. Pension Fund requested HSBC’s assistance in  selecting off-shore mutual funds similar to the domestic funds Pension Fund previously had been offering to its investors through the trust plans.  Pension Fund agreed that HSBC could keep all loads paid by the funds in connection with those transactions. The Pension Fund principals also requested the use of HSBC’s logo and name in its revised offering materials. 
	9. In evaluating whether to accept Pension Fund as a client, HSBC obtained information about Pension Fund and its principals. One of the relationship representatives conducted internet searches for press releases and news articles about Pension Fund. Pension Fund’s principals provided HSBC with photo identification, information about their personal net worth, and the approximate net asset value of investor shares and amount of funds that HSBC would receive if it accepted the new relationship.  
	10. The relationship representatives also conducted an on-site visit of Pension Fund to verify the business’ existence and learn about Pension Fund’s operations. In addition, because HSBC was not going to have direct contact with the Pension Fund investors, the relationship representatives obtained information regarding Pension Fund’s “Know Your Customer” procedures. Pension Fund also sent HSBC its unaudited financial statements for the year ended December 31, 2002, which indicated that while Pension Fund had recognized $14.2 million in gross revenues for that year, $5.2 and $6.0 million of those funds were expenses for sales agents’ commissions and distributions to Pension Fund’s principals, respectively. 
	11. In August 2003, HSBC agreed to accept Pension Fund as a new customer and serve as trustee for the investment component of the Pension Fund trust plans.  On August 7, 2003, Pension Fund and HSBC executed a Master Trust Agreement, which defined the terms and scope of HSBC’s duties as trustee. Specifically, under the Master Trust Agreement, HSBC would serve as trustee for the investment component of the Pension Fund plans and create a Master Trust Account to hold the assets designated by Pension Fund as the investment component of the investors’ trust plans. The Master Trust Agreement, printed only in English, also indicated that HSBC’s duties were limited to acting as custodian of the investment component of the plan, receiving investor funds, retaining custody of those funds in sub-accounts and investing or disbursing investor funds as directed by Pension Fund. The Master Trust Agreement gave Pension Fund the right to use HSBC’s name and logo in Pension Fund’s marketing materials. Pension Fund prepared new offering materials purportedly reflecting the new relationship with HSBC, and provided the offering materials to HSBC for its review and approval. The offering materials included two contracts titled “Guide to Plan Provisions” and “Plan Transfer Provisions” (collectively “Plan Provisions”), and two glossy marketing brochures. 
	12. The marketing brochures, printed in both Spanish and Portuguese, contained a general overview of Pension Fund’s plans and included HSBC’s logo, pictures of HSBC’s corporate headquarters, and other general information about HSBC. The brochure stated that HSBC was the “second largest commercial bank in the world.” In addition, the marketing brochures represented that: “Pension Fund and HSBC Bank, USA have created the Liberty Trust Plan for you.” The brochures further assured investors of the safety of their funds, describing HSBC as the investors’ trustee and claiming, “Your money is in the best hands – HSBC Bank, USA.” The marketing brochures provided a list of mutual funds offered as part of the trust plans. Pension Fund’s marketing brochures did not disclose information about the sales commissions, administrative expenses, or the front load mutual fund fees charged to the investor. These marketing brochures also did not include information about any limitations to HSBC’s role as trustee. 
	13. The Plan Provisions provided more details about the trust plans’ investment and insurance components, and included HSBC’s logo and the legend “HSBC Bank USA as Trustee” on the cover page. The Plan Provisions defined “Trustee” as “HSBC Bank USA, which shall serve as trustee for the Investment Component of the Plan in accordance with the provisions of the Master Trust Agreement.” The Plan Provisions generally disclosed that up to 80% of the investor’s initial contribution in the Liberty Plan would be used to pay “plan expenses,” which were generally defined as the cost of insurance, the fees associated with purchasing the mutual funds selected by the investor, sales commissions and brokerage fees, and other “administrative fees.” The Plan Provisions did not provide a specific breakdown of the nature and specific amount of all the fees and costs associated with the plans, nor did it disclose that up to 50% would be used to pay commissions to sales agents. 
	14. During the Relevant Period, HSBC had procedures in place providing for the review of any materials using the HSBC name or logo. Those procedures required that the relationship representatives forward the Pension Fund marketing materials to the marketing department for its review of the size, placement, and color of the HSBC logo. The procedures also required the relationship representatives and/or the marketing personnel to forward the materials to the compliance and legal departments for a substantive review of the language in those materials. Finally, the procedures further required that any materials considered to be “co-branding” (i.e., jointly offered or sold by HSBC and another entity), be sent to the Group Head Office and Group Marketing Office (“Group Offices”), located at HSBC’s parent company, HSBC Holdings, in London, England. Given the language in the marketing brochures suggesting that the trust plans were “created” by Pension Fund and HSBC, had these procedures been followed, the compliance and legal departments would presumably have reviewed the materials to determine whether the co-branding procedures were triggered or, in the alternative, whether the language of the brochures should have been modified to make clear that the trust plans were not jointly offered by Pension Fund and HSBC. 
	15. When reviewing Pension Fund’s new marketing materials, HSBC failed to follow its own internal marketing approval procedures. Although the relationship representatives forwarded the marketing brochures to the marketing department for review, neither the relationship representatives nor the marketing department forwarded the materials to the compliance and legal departments, or Group Offices, for a substantive review of the language in the marketing materials. While HSBC did send the Master Trust Agreement and Plan Provisions to outside legal counsel for review, neither of the marketing brochures were reviewed by HSBC’s compliance and legal departments, or outside counsel, for the purpose of assessing the adequacy of the representations and disclosures in those materials. 
	16. HSBC administered its duties as trustee within its Retirement Financial Services (“RFS”) group of HSBC’s Private Bank. The Pension Fund trust plans were not the typical retirement plans serviced by HSBC’s RFS group, which primarily serviced U.S. employer-sponsored retirement plans, where the member employees reside in the U.S. and have direct access to HSBC’s services. In contrast, Pension Fund’s investors were not employees of Pension Fund, they were not U.S. residents, and they did not have direct contact with or access to HSBC or its services. Pension Fund’s investors did not have access to HSBC’s Website, Infoline or Call Center, and HSBC instructed its staff to direct all inquiries from Pension Fund’s investors to Pension Fund. 
	17. After the execution of the Master Trust Agreement, HSBC discussed with Pension Fund using off-shore mutual funds, because Pension Fund represented to HSBC and the marketing brochures expressly stated that the trust plans could not be sold in the U.S. and were not available to U.S. citizens or residents.  Pension Fund agreed, stating that its only requirement was that the funds have name recognition and that the available selection included a variety of funds.  HSBC identified a variety of off-shore mutual funds similar to the domestic funds Pension Fund previously had been offering.  Since Pension Fund had agreed that HSBC could keep any of the fees paid by the mutual funds in connection with the trust plans, one of the significant factors considered by the relationship representative was the amount of front load fees paid by the mutual funds selected.  HSBC created a Master Trust Account to hold the mutual fund shares purchased on behalf of Pension Fund investors. The mutual fund selections were included in the investor application provided to prospective investors with the revised offering materials. 
	18. Pension Fund distributed the revised offering materials to its prospective investors, and instructed certain investors to make their contribution checks payable to HSBC. Pension Fund remitted the checks for deposit to a “Gross Premium” account in the name of Pension Fund, which essentially functioned as a checking account. Pension Fund then provided weekly transmittal reports to HSBC that instructed HSBC as to how much to invest in each of the mutual funds selected, and how much should remain in the “Gross Premium” account (or be transferred to another Pension Fund account) in the form of “fees.” During the relevant period, the weekly transmittal reports revealed that in certain instances, Pension Fund directed only a minimal portion of its investors’ funds be invested in mutual funds, in some cases allocating as much as 95% of the investor’s contribution to “fees” to remain in Pension Fund’s “Gross Premium” account. 
	19. In October 2003, one of the relationship representatives drafted a letter on HSBC letterhead announcing the new relationship between HSBC and Pension Fund, and inviting certain of Pension Fund’s existing investors to transfer their funds from other financial institutions to HSBC. Pension Fund sent the letter to approximately half of its existing investors, and enclosed a form with the HSBC logo that listed the new mutual fund selections available to investors upon transfer to HSBC. Neither the letter nor the enclosure informed investors that they would incur new front load fees in connection with that transfer, or the amounts of those prospective costs. 
	20. In February 2004, HSBC learned that some of the mutual fund companies were not charging Pension Fund’s investors the full front load fees they had negotiated with Pension Fund. HSBC asked the mutual fund companies to rebook the trades and charge the higher front load fees for the Pension Fund investors.  In return, some of the mutual fund companies required HSBC to provide them with hold-harmless letters. HSBC did not disclose the rebooking of these fees to Pension Fund’s investors. 
	21. During 2004, one of the relationship representatives traveled to Central and South America four times at Pension Fund’s request to meet with sales agents.  Pension Fund asked the relationship representative to attend these meetings to add credibility to Pension Fund and its relationship with HSBC. Some investors attended at least one of these meetings.  At these meetings, the relationship representative discussed HSBC’s relationship with Pension Fund and, in one of these meetings, used a power-point presentation to describe different banking and investment services offered by HSBC.   
	22. In July 2004, certain of the relationship representatives first learned about a civil action brought against Pension Fund by the Guatemalan military pension fund, Instituto De Prevision Militar and Inverma S.A. (“IPM”), from an article in Prensa Libre, a Guatemalan newspaper.  Instituto De Prevision Militar and Iverma S.A. v. Pension Fund of America, et al. Case No. 020730 CA 27 (Fla. Cir. Ct.) (“IPM civil action”).  The newspaper reported that IPM had filed a suit in Florida state court in November 2002, alleging that Pension Fund had defrauded the Guatemalan military pension fund, and that its principals had misappropriated $24 million of pensioners’ funds. These relationship representatives met with Pension Fund’s principals and Pension Fund’s outside counsel to discuss IPM’s allegations, and were told the allegations were “without merit.” HSBC accepted this representation. 
	23. In September 2004, HSBC Holdings informed the relationship representatives that an HSBC branch office in Brazil had obtained copies of the Pension Fund marketing materials from an unaffiliated sales agent whose client was interested in investing in the trust plans. Among other things, the HSBC branch office in Brazil was concerned that the predominance of HSBC in the marketing brochure incorrectly implied that HSBC sponsored the trust plans. Thereafter, HSBC’s compliance department, for the first time, reviewed Pension Fund’s marketing brochures and the power point presentation used in Latin America. The compliance department made some changes to the marketing brochures and the power point presentation.  The compliance department did not, however, forward the marketing brochures or other materials to HSBC’s legal department. Moreover, although HSBC’s compliance department did not complete its review of Pension Fund’s marketing brochures until December 2004, HSBC allowed Pension Fund to continue to use its marketing brochures in all of its sales territories except Brazil. 
	24. From August 2003 through March 28, 2005, HSBC earned trust and recordkeeping fees from Pension Fund, and fees paid by mutual fund companies in connection with investors’ mutual fund transactions. 
	 
	 
	25. As a result of the conduct described above, HSBC caused Pension Fund’s violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act.   A violation of these provisions may be established by a showing of negligence.   Aaron v. SEC, 448 U.S. 680, 697 (1980).   
	IV.  



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    /SVE <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>
    /ENU (Use these settings to create Adobe PDF documents for quality printing on desktop printers and proofers.  Created PDF documents can be opened with Acrobat and Adobe Reader 5.0 and later.)
  >>
  /Namespace [
    (Adobe)
    (Common)
    (1.0)
  ]
  /OtherNamespaces [
    <<
      /AsReaderSpreads false
      /CropImagesToFrames true
      /ErrorControl /WarnAndContinue
      /FlattenerIgnoreSpreadOverrides false
      /IncludeGuidesGrids false
      /IncludeNonPrinting false
      /IncludeSlug false
      /Namespace [
        (Adobe)
        (InDesign)
        (4.0)
      ]
      /OmitPlacedBitmaps false
      /OmitPlacedEPS false
      /OmitPlacedPDF false
      /SimulateOverprint /Legacy
    >>
    <<
      /AddBleedMarks false
      /AddColorBars false
      /AddCropMarks false
      /AddPageInfo false
      /AddRegMarks false
      /ConvertColors /NoConversion
      /DestinationProfileName ()
      /DestinationProfileSelector /NA
      /Downsample16BitImages true
      /FlattenerPreset <<
        /PresetSelector /MediumResolution
      >>
      /FormElements false
      /GenerateStructure true
      /IncludeBookmarks false
      /IncludeHyperlinks false
      /IncludeInteractive false
      /IncludeLayers false
      /IncludeProfiles true
      /MultimediaHandling /UseObjectSettings
      /Namespace [
        (Adobe)
        (CreativeSuite)
        (2.0)
      ]
      /PDFXOutputIntentProfileSelector /NA
      /PreserveEditing true
      /UntaggedCMYKHandling /LeaveUntagged
      /UntaggedRGBHandling /LeaveUntagged
      /UseDocumentBleed false
    >>
  ]
>> setdistillerparams
<<
  /HWResolution [2400 2400]
  /PageSize [612.000 792.000]
>> setpagedevice