Trust Updates Archive
(December 3, 2010 --Chicago, IL) -- HSBC violated “the Prudent Investor Act and its own internal policies” in failing to diversify seven family trusts, New York state Surrogate Judge Barbara Howe ruled November 24. She awarded the trusts $25.1 million in damages. The bank is appealing the decision.
The ruling stems from HSBC’s decision to resign as trustee of the Knox family trusts in 2006. This process required the bank to file an accounting with the local court. The accountings were challenged both by adult beneficiaries and a guardian ad litem appointed by Judge Howe.
The trusts were initially funded by Woolworth and Marine Midland (now HSBC) stock. In awarding damages, Judge Howe faulted the trustee for delaying diversification of those holdings. In addition to the bank’s failure to diversify, Howe also found fault with the bank’s investment in certain publicly-traded securities.
In determining damages, Howe relied on a 1997 New York state decision, known as the Janes rule. This rule calculates damages based on the lost capital approach. Howe rejected the bank’s argument that capital gains taxes should be factored into the calculation. Doing so, Howe noted, would subject the trusts to double taxation.
In a similar New York case, a state appeals court overturned a $20 million damage award In the Matter of Dumont, which turned on Chase Manhattan’s retention of a large concentration of Eastman Kodak stock. The appeals court in Dumont did factor in capital gains taxes.
For more on this topic, see the upcoming issue of Trust Regulatory News.
No statement in this issue is offered as or should be construed as legal opinion or advice or as an indicator of future performance.
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