HSBC Holdings plc 's HSBC American unit - HSBC Finance Corporation - has resolved a 14-year old class action lawsuit pertaining to events preceding the acquisition of Household International Inc. in 2003 by the London-based bank. The company will be paying $1.575 billion (£1.11 billion) to settle the case.
Owing to the settlement, HSBC is expected to record a pre-tax charge of roughly $585 million in the second quarter of 2016. Notably, the settlement is still subject to the court approval. Earlier, the company had disclosed that this lawsuit settlement could be for approximately $3.6 billion.
HSBC spokesman Rob Sherman said in a statement, "We are pleased to resolve this 14-year case that's based on events that took place before HSBC acquired Household." Following this settlement revelation, HSBC declined more than 2% on NYSE in the after-market trading.
The case, filed in 2002, accused Household International and some of its top executives of misrepresenting statements regarding the company's lending practices and quality of loan portfolio. This led to financial results that showed overstated profits, which in turn inflated the company's share price.
In Oct 2002, Household International had agreed to pay $484 million to settle allegations of using predatory lending practices in several U.S. states. Following this settlement, share price of Household International plunged over 50% from mid-2001 to Oct-2002.
Thereafter, the company's shareholders filed this case. In 2009, a jury had ruled in favor of the plaintiffs and HSBC was hit with $2.46 billion penalty in 2013.
However, HSBC challenged the fine imposed on it and in May 2015, the company was granted partial relief by the US Court of Appeals for the Seventh Circuit. Hence, a second trail was ordered.
Notably, just a few days before the trail began, HSBC decided to settle the case.
Lawsuit Resolved but Concerns Remain
Though the settlement will be hurting HSBC's second quarter results, we believe that it removes a legal headwind. Over the last few years, the company has been paying billions of dollars in legal settlements for past business misconducts.
HSBC has been striving hard to boost top line amid challenging operation backdrop. Driven by its cost savings and restructuring plans, the company has maintained its profitability. However, global growth concerns, feeble loan demand and stringent regulations are exerting pressure on the company's financials.
Currently, HSBC carries a Zacks Rank #4 (Sell). Some better-ranked foreign banks include Barclays PLC BCS , Itaú Unibanco Holding S.A. ITUB and Canadian Imperial Bank of Commerce CM . All these stocks hold a Zacks Rank #2 (Buy).
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