Republic New York report clears way for HSBC takeover

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AN INTERNAL report into the $1.5bn financial scandal that has cast a cloud over HSBC's $10.3bn bid for Edmond Safra's Republic New York has backed the view of senior management at the bank, that its involvement in the alleged fraud is limited and does not raise issues that should prevent the takeover going ahead as planned.

The confidential report which was handed by Republic to HSBC on Wednesday, concludes that the bank became embroiled in the alleged securities fraud because of a rogue individual and that the likelihood of a material claim against the bank by the Japanese companies that have lost money as a result is slim.

The report will come as a huge relief to both Republic and to HSBC, the banking giant, which had delayed implementation of the deal pending a full investigation into Republic's role in the alleged fraud. Republic Securities acted as custodian on behalf of Michael Armstrong, a well-known American markets commentator who was charged with securities fraud earlier this month.

A senior director of HSBC is due to attend a board meeting of Safra Republic Holdings, Republic's largest shareholder, in Geneva today. It is likely that the meeting will open the way for work on the takeover deal to resume. A statement from the two banks is expected early next week. Republic refused to comment yesterday.

According to the report which was carried out by KPMG, the bank's auditors, and the top New York law firm Sullivan & Cromwell, the only employee with knowledge of Mr Armstrong's trading relationship with Republic was William Rogers, the head of the futures division of Republic New York Securities who has been identified in court documents as the point of contact for Mr Armstrong's firm, Princeton Economics. Mr Rogers' superior, James Sweeney, who was suspended immediately after the investigation began, has been cleared of collusion although there are bound to be questions over his supervision of Mr Rogers' activities.

The report also points out that Republic Securities is an "arm's length" company which the parent was intending to close down. The advice is that any legal liability for damages would be limited to the $76m of equity still held by the securities arm.