HSBC Holdings PLC's U.S. consumer finance arm, which the London company is shuttering, is to go on trial this week in a suit alleging that its predecessor, Household International Inc., hid predatory lending practices from shareholders.
Jury selection was to take place Monday in U.S. District Court for the Northern District of Illinois in Chicago. The shareholders' suit was filed in August 2002, seven months before HSBC bought Household for $15.5 billion. (The unit was later renamed HSBC Finance Corp.)
"It's a real gamble" for the company to go to trial rather than settle out of court, said Robert Zito, a securities lawyer in the New York firm Carter Ledyard & Milburn LLP who is not involved in the case. "It's a difficult case to try in this financial climate" because "there are some jurors who are going to say, 'It's just not fair.' "
HSBC said this month that it would shut down HSBC Finance in Mettawa, Ill. A spokeswoman for HSBC's North American operations would not discuss the stockholders' allegations.
The lead plaintiffs' law firm, Coughlin Stoia Geller Rudman & Robbins LLP in San Diego, has said the suit may be worth $1 billion.
Household paid a record $484 million fine in October 2002 to settle a dozen states' claims that it had deceived borrowers about their mortgage terms.
"The company estimated that it had overcharged customers approximately $3.2 billion" and inflated its reported profits from 1999 to 2001, Michael Dowd, Coughlin Stoia's lead attorney on the case, said in a pretrial court filing. Speculation about regulatory probes into the company's practices drove down the share price from $60 in November 2001 to $28 in October 2002, Dowd said in the complaint.
HBSC's lawyers countered that none of Household's challenged business practices were concealed from investors.
"The market knew that Household engaged in practices that some considered to be unfair and that Household's profits … could be adversely affected if [it] were forced to appease critics," its attorneys said in a filing.
U.S. District Judge Ronald Guzman, who is presiding over the trial, has divided it into a segment, probably lasting four weeks, during which liability will be decided, he told lawyers on March 26, and a week-long segment to consider damages, if the jury finds in shareholders' favor.