December 3, 2023

Sketch Guy: When Labeling Yourself Middle Class Can Hold You Back

It seems to me that we really like the idea of what it means to be middle class. And why wouldn’t we? For most of us, we associate it with things like having steady jobs, owning a home and taking regular vacations. It’s the American dream brought to life, and we like it so much that it’s become not only an economical identity but a cultural one, too.

If you think I’m exaggerating, take a look at a recent Wall Street Journal/NBC News poll. The results revealed that what we define as middle class has more to do with how we think of ourselves than any particular number. Not too surprisingly, we tend to compare ourselves against what we know:

■ 48 percent of people earning $40,000 – $50,000 consider an income of $50,000 middle class.

■ 50 percent of people earning $50,000 – $75,000 consider their income middle class.

■ 39 percent of people earning $75,000 – $100,000 consider their income middle class.

Why does this matter? Because labels with strong emotions behind them, like “middle class,” change how we think about ourselves and make decisions, especially financial ones. For instance, when people identify themselves as middle class, I see many of them make a common mistake: they fail to engage in the process of financial planning.

The reasons probably won’t surprise you, but if people call themselves middle class, they probably don’t think in terms of having wealth or assets that can benefit from financial planning. They think in terms of having a mortgage, a 401(k) and maybe a savings account. They’re not wealthy, and only the wealthy need to worry about investing or planning.

That’s wrong on so many levels.

I’m not arguing that we’re all secretly wealthy. I’m suggesting that we’re cheating ourselves out of greater financial security because we’re making an assumption about what the labels mean. The reality is that most of us have good reasons to plan for the future, like buying a home, paying for college and enjoying retirement.

There is no reason we shouldn’t be using every tool available to help us improve the odds we’ll reach those goals. It doesn’t matter that we may not have as many options as those available to an investment banker. We owe it to ourselves to understand the options we do have and then make plans that get us to where we want to go.

We’re making a similar mistake if we assume we won’t find people to help us when we do need more help. The reasons often come down to money. Time after time, people will tell me they aren’t seeking help because they can’t afford it.

The problem with this assumption is that it ignores the professionals — C.P.A.’s, lawyers, advisers — who make it their mission to help people who don’t have seven-figure balance sheets. There are plenty of them out there; we just need to take the time to find one if we need help.

We’ve got to stop making assumptions like this one and others like it. All they lead to is the common mistake of thinking that financial planning doesn’t matter to people who identify with labels like middle class. I don’t know of anyone who can afford the consequences of that particular thinking.

Instead, we need to make smart financial decisions and not limit our options based on how we label ourselves. We need to take the best information available and make the most of it, even if it means doing things we associate only with wealthy people. Regardless of how much, or how little, we think we have, we’re cheating ourselves if we assume that we don’t need a plan to take care of it and make the most of it.

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Sketch Guy: Some Investing Stories Sound Good Until You Analyze Them

Making smart money decisions is an incredibly difficult way to behave. So after my post last week about buying a house based on your situation, my jaw dropped when I saw an article in The Wall Street Journal about young home buyers.

“A new generation is skipping the ‘starter home’ and betting heavily on high-end real estate.”

Seriously? We’re back to “betting” on real estate?

Now, the stories are incredibly persuasive, but hidden within them is something else. When asked why they are buying an expensive home, or even buying multiple expensive homes to rent, young buyers say they are doing it as an investment strategy.

“Buying real estate has grown more attractive, these young buyers say, compared with the stock market, which appears riskier to a generation that entered the work force during a market correction,” the article in The Journal says.

This reminds me a lot of what I have referred to before as “that guy.” It’s the guy at a neighborhood barbecue or in the office who always has a story to share about how easy it is for him to make money. The problem is he only talks about the times he made money, not the times he didn’t.

The stories of these young real estate buyers, like Matt Winter, follow a similar theme.

“ ’I have always felt that having your money in property is the safest and best thing to do if you want to grow your personal wealth,’ says Mr. Winter, who founded his design company at 23. None of Mr. Winter’s assets are in the stock market — he says the market ‘spooks him’ and that he prefers to invest in real estate,” the Journal article reads.

Stop and think about this for a minute. Mr. Winter is now all of 28, and the story he is telling is that property is the safest place to increase your wealth. But I suspect that if you ask anyone dealing with real estate in the last 10 years (or who is over 40), they would disagree with the idea of it being safe. So why is our attention caught even though our experience tells us something different?

When we hear stories like this one, about young, beautiful people spending a lot of money, it’s easy to go with the assumption that they must be making smart decisions, too. After all, who doesn’t want to buy a house on the beach? And in our desire to be like what we see in those glossy beauty shots, we ask the question, “Shouldn’t I be doing that, too?”

We remind our children all the time, “If your friend jumped off a cliff, would you?” And yet when we ask that question, we are engaging in similar herd behavior. We need to recognize that we aren’t those people, and whether they are making a good decision isn’t the point. All that matters is whether it is actually a good decision for us, and these stories can make it difficult to reach this conclusion.

So lest you think I’m picking on these people only because they are young, beautiful and wealthy, let’s take a look at what are some flat-out questionable arguments.

Buying real estate is a safe way to build wealth. Because most people don’t hand over a sweaty wad of cash, real estate usually involves leverage in the way of a mortgage. While leverage can be good, it’s a double-edged sword. There are certainly home buyers in Phoenix and Las Vegas who would argue with the idea that property is the safest investment.

You will get hurt in the stock market. I get why real estate looks so attractive, especially to younger buyers. As the article noted, it is hard to trust the stock market if what you have seen to date hasn’t been wonderful. But it takes a willingness to ignore history to go with the story that real estate represents a sure thing in comparison to the stock market.

It makes sense to buy a second property as an investment. If you’re thinking about becoming a landlord, think again. Barry Ritholtz captured the problem with the rental market perfectly: There are a lot of rental properties just sitting on the market. And with a lot of people playing the rental and investment game at the moment, can you afford to have your investment property sitting empty? Don’t assume that a home you have bought to rent will actually generate rent every month to justify the purchase.

Buying real estate may turn out to be a great decision for the people profiled in The Wall Street Journal. But the notion of real estate as being somehow a better or safer investment than the stock market doesn’t add up based on what we know.

We know that the weighty evidence of history tells us that having a low-cost, well-diversified portfolio has been the better investment in the long run. We know that we probably don’t want to become landlords, either. And most important of all, we know what matters most when it comes to investing success: behavior.

So the next time you see stories like this one, keep in mind that you know better. You know what questions you need to ask before buying a house. You know what kind of investments you need to reach the goals that matter to you. And you know that what might work well for someone else isn’t guaranteed to work for you.

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Bucks Blog: How to Get Reasonably Priced Help With Investments

This weekend’s Your Money column is of a piece with several I’ve written in the past, all revolving around the question of how to get competent people to help you with your investments for a reasonable price.

Over the years, most of those competent people have tended to work only with customers who have a lot of money, with the exception of a small cohort of financial planners who deign to work by the hour. Reasonably priced (or free) help tends to come from people who are earning commissions of some sort from the provider of the investment product that they are selling you. And all too often, they are more concerned about their payment than your long-term financial health.

Now comes Rebalance IRA, the latest in a series of services like Wealthfront, Betterment and others that want to put you in the right kind of investments for a price much lower than the standard 1 percent of assets per year that wealthy people tend to pay for full-service financial planning.

So would you give up one half of 1 percent of your investments each year to an adviser like the ones at Rebalance IRA? Or are you among the few people who are in control enough of their emotions to be able to manage their own money effectively?

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DealBook: Lehman Estate to Sell Archstone for $6.5 Billion

The deal that helped sink Lehman Brothers is now playing an important role in paying off the failed investment bank’s creditors.

The Lehman estate agreed on Monday to sell Archstone, the sprawling apartment complex company, to Equity Residential and AvalonBay Communities for about $6.5 billion in cash and stock.

Under the terms of the deal, the Lehman estate will receive $2.685 billion in cash, as well as shares in Equity Residential and AvalonBay worth about $3.8 billion. The two apartment companies will also assume Archstone’s roughly $9.5 billion in debt.

By selling Archstone, the Lehman estate will dispose of its single biggest asset, as it continues its efforts to wind itself down and pay off the firm’s legions of creditors. And it will signal the latest twist for a property that has played an important role in Lehman’s demise.

Lehman bought Archstone in 2007, paying more than $22 billion to buy the apartment complex operator at the very height of the housing boom. That leveraged buyout piled even more debt onto an already overburdened firm, significantly contributing to its demise in the fall of 2008.

Since then, however, Archstone has become regarded as one of the crown jewels in the Lehman estate’s pile of assets. And as the estate has sold off a number of its other properties, from the asset manager Neuberger Berman to sundry other real estate holdings, the apartment company was held out as the best opportunity for a major payday.

Such was the Lehman estate’s zealousness that it bought out its partners in Archstone, Bank of America and Barclays, earlier this year, spending a total of $2.88 billion. The goal then was to prevent the firms from selling their holdings to Equity Residential too cheaply.

The stock component of the transaction announced on Monday will give make the Lehman estate the single biggest investor in Equity Residential, with a 9.8 percent stake, and in AvalonBay, with a 13.2 percent stake.

The purchase price represents a roughly 17 percent premium to what the Lehman estate had valued the apartment complex operator.

“The sale of Archstone to Equity Residential and AvalonBay is a very positive outcome for our creditors,” Owen Thomas, the chairman of Lehman’s board of directors, said in a statement.

Equity Residential, which is run by the billionaire Samuel Zell, will own about 60 percent of Archstone’s assets and liabilities. AvalonBay will own the remainder.

Lehman was advised by Gleacher Company, Citigroup, JPMorgan Chase and the law firm Weil, Gotshal Manges.

Equity Residential received advice from Morgan Stanley and the law firms Hogan Lovells and Morrison Foerster. AvalonBay was advised by Greenhill Company and the law firm Goodwin Procter.

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High & Low Finance: S.E.C. Charges Company That Filed Under JOBS Act With Fraud

In its prospectus, a penny stock named Caribbean Pacific Marketing proudly described itself as an “emerging growth company” when it began to sell shares to the public this summer.

To someone uninitiated to the Orwellian nature of recent legislation, that phrase might have seemed downright deceptive. As the prospectus made clear, it was not a growth company; it was barely even a company at all. It hoped to start a business with the proceeds from the offering.

But that phrase was enshrined in legislation officially called the JOBS Act, which Congress passed and the president signed this year in an unusual display of bipartisanship.

Now, Caribbean Pacific Marketing — a company without revenue since it was created earlier this year — appears to have become the first “emerging growth company” as defined by the JOBS Act to have prompted charges of securities fraud by the Justice Department and an effort by the Securities and Exchange Commission to halt sales of the stock. The government claims a disbarred lawyer from Boca Raton, Fla., is really behind the company.

Those charges came two months after the S.E.C. allowed the company to begin selling shares under a prospectus that the government now says it knew to be inaccurate.

The Jumpstart Our Business Start-ups Act defined nearly every business in the United States as an “emerging growth company.” No growth was needed to qualify as such a company, only that it must have less than $1 billion in assets, less than $700 million in shares in public hands and less than five years as a public company. Such companies could sell stock to the public with fewer restrictions, and then report less information to their shareholders than was required from normal companies.

The idea was that numerous new companies would get financing, and in that way promote job growth. Critics warned that some provisions might simply make it a lot easier to commit securities fraud. Alternate titles like “Jumpstart Our Bilking of Suckers Act” were suggested.

It is far too soon to pronounce on the act’s success. The S.E.C. has yet to issue some important rules, so innovations like crowdfunding, whereby it becomes legal to market possible offerings to anyone on the Internet before a registration statement has been filed, have yet to get off the ground. Some of the companies that have gone public under the JOBS Act provisions have done well in subsequent trading.

Caribbean Pacific was formed in January, selling 20 million shares of stock to insiders for $30,000. After expenses for things like a Web site saying it plans to sell “the finest all-natural sun care and skin care products,” it had precisely $20 left at the end of June.

The company planned to sell up to one million new shares to the public at 15 cents each, 100 times what the insiders paid. The S.E.C. allowed the offering to begin in August, but it is not clear how many shares have actually been sold. The company said over-the-counter trading would begin as soon as 500,000 shares were sold, something that has not happened. It promised that if the minimum number of shares were not sold within nine months, it would return the money to the buyers.

The strategy may have never actually called for that offering to succeed at all. It appears that some of those insider shares were being sold privately, with the promise that the buyers could earn a quick profit by reselling them as soon as the company went public. Such sales would not be legal.

Last week the Justice Department charged that the disbarred lawyer, William J. Reilly, had been trying to sell shares before the offering became effective. Unfortunately for him, he did sell some shares — at 5 cents each — to a buyer who turned out to be working with the F.B.I. In the complaint filed in Federal District Court in Miami, an F.B.I. agent stated the bureau has been conducting, with the S.E.C., “an ongoing undercover investigation targeting penny stock fraud in Florida.”

The complaint stated that Mr. Reilly claimed to own 9.2 percent of the company’s shares, although the prospectus, in its list of people who owned at least 5 percent, did not mention him. The S.E.C. action, announced this week, claimed that Mr. Reilly secretly controlled the company and asked that an administrative law judge halt the public offering.

Mr. Reilly previously settled — without, of course, admitting or denying he actually violated any laws — an S.E.C. suit claiming he had done something similar at other penny stock companies, allowing insiders to sell restricted shares when they should not have been permitted to do so. He was ordered to comply with the law in the future and barred from practicing as a lawyer before the S.E.C. Last year, the S.E.C. filed another suit, claiming he was continuing to act as a securities lawyer for another penny stock company based in Boca Raton. In March of this year, a federal judge ordered him to comply with the original injunction. In May, he was disbarred for “misappropriating” money held for a different corporate client.

Floyd Norris comments on finance and the economy at

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Rule to Allow Regulators Detailed Look at Big Hedge Funds

WASHINGTON — Large hedge funds, the very private investment outfits that borrow money to magnify their big financial bets, will be required for the first time to report detailed information on their investments and borrowings under a rule adopted by the Securities and Exchange Commission on Wednesday.

But hedge funds and their advocates, after intense lobbying, won several important concessions from the commission’s earlier proposal. The changes call for only the largest funds to report the most detailed information, eliminate any penalty of perjury for misleading reports and delay for six months the initial reports for all but the largest funds.

The data gathered from the new reporting will not be public; only regulators will have access to it.

The filings will come two months after the close of a quarter, instead of the originally proposed 15 days after a quarter’s end. The most detailed information will be required of funds with more than $1.5 billion in assets, rather than $1 billion as originally proposed. Hedge funds will not have to report on individual holdings in their portfolio, as originally contemplated. Instead they will have to report only on aggregate holdings in different types of assets, by the geographic location of their investments and describe how active the fund is in trading its portfolio. Small hedge funds, with less than $150 million in assets, will not have to report any detailed information on their holdings.

The required reporting, which grows out of the financial crisis three years ago, is meant to allow financial regulators to monitor the risks that the funds may pose to the nation’s overall financial system, something that officials at the Federal Reserve, the Treasury Department and the S.E.C. did not have during the crisis.

For now, even the details of what the S.E.C. approved on Wednesday will be confidential. Because the new rules are a joint release with the Commodity Futures Trading Commission, the S.E.C. won’t make public the form that it approved in a public meeting until after the C.F.T.C. approves it. The commodity commission is expected to vote “within the next week,” the S.E.C. said. The commission could approve the rule in private. A C.F.T.C. spokesman declined to comment.

The data will be visible only to regulators including the Financial Stability Oversight Council, a panel of the top federal financial regulators led by the Treasury secretary, which was created by the Dodd-Frank regulations.

The data collection “follows the lessons learned during the financial crisis — lessons about the importance of monitoring and reducing the possibility that a sudden shock or failure of a financial institution will cascade through the entire financial system,” Mary L. Schapiro, the S.E.C. chairwoman said.

The commission, which now has four sitting members, voted unanimously to approve the rule.

Regulators passed a separate set of requirements this year for hedge funds to provide some information that would be made public. Those regulations required limited disclosures, however, detailing only general information about a fund’s size, its largest investors and the fund’s “gatekeepers,” including its auditors, the brokerage firms that help to execute its trades and the marketers that service the fund.

An S.E.C. official said that the commission might aggregate and publish some data on the size and scope of the hedge fund industry based on the confidential information, but it would not identify individual funds or advisers.

While anonymous information has some benefits, analysts will not have a chance to call attention to specific parts of the industry or individual firms that pose potential risks to themselves, their counterparties or segments of the entire industry.

Still, the new data could highlight industry-wide problems like an over-concentration in one type of investment. Had this data been more widely available before the financial crisis, regulators might have seen the risks posed by a concentration of mortgage-backed securities investments and related instruments that led to the 2008 crisis.

Under the new rules, all hedge funds with more than $500 million or more in assets must disclose how leveraged their investments are — that is, the degree to which the size of the investments are enhanced using borrowed money. It would also look at how liquid, or quickly sold and converted into cash, they are.

Smaller hedge funds, with $150 million to $500 million in assets, will report their general fund strategy, what firms handle their trading and clearing operations, and their counterparty risk — that is, what financial firm is on the other side of complicated bets like derivatives and which could stand to lose if the fund was unable to honor its obligations.

Azam Ahmed contributed reporting from New York.

This article has been revised to reflect the following correction:

Correction: October 26, 2011

An earlier version of this article stated incorrectly when large hedge funds would be required to report information on their holdings. The information is due quarterly, not annually, and within 60 days of the end of the quarter, not 120 days of the end of a fiscal year.

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Business Briefing | FINANCE: The F.D.I.C. Closes First National Bank of Florida

Regulators on Friday closed a small bank in Florida, raising to 71 the number of bank failures this year. The Federal Deposit Insurance Corporation seized First National Bank of Florida, based in Milton, Fla. The bank had $296.8 million in assets and $280.1 million in deposits. CharterBank, based in West Point, Ga., agreed to assume the assets and deposits of the failed bank.

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Wealth Matters: For the 2nd Time, Voluntarily Disclose Your Offshore Accounts, or Else

Everyone should know this, but that makes the Internal Revenue Service’s current program of voluntary disclosure intriguing. The program came about after a similar one in 2009 drew in some 15,000 formerly undeclared accounts. But after it officially ended, thousands more came forward, flooding the I.R.S. enforcement system.

So it made sense from an I.R.S. perspective to offer a second round of disclosure, which began in February and ends on Sept. 9. (The deadline, originally Aug. 31, was extended Friday because of Hurricane Irene.)

Yet the structure of this program has given pause to people who haven’t declared offshore accounts. The penalties are steeper — up to 25 percent of the value of the assets — and they’re assessed on the highest value of those assets over the last eight years.

The Justice Department, which prosecutes tax evasion cases, is making sure people know that the penalties are real. Earlier this month, it announced that a California man named Robert E. Greeley had pleaded guilty to filing a false income tax return that concealed $13 million in two offshore accounts at UBS in Switzerland. Mr. Greeley paid a $6.8 million penalty for his failure to file a report of foreign bank accounts.

The penalty could have been worse. Mr. Greeley had set up two shell companies in the Cayman Islands to hide his ownership of the accounts. When someone willfully seeks to evade taxes, as he did, the penalty can be as high as 50 percent of the account value for every year it existed. (A separate fraud penalty can also be levied.)

“Some people will say, ‘I didn’t have my account at UBS so they’re not going to find out,’ ” said Warren Whitaker, a partner in the individual clients department at Day Pitney in New York. “The reality is the world is shrinking, and people who think they can squeak by and they won’t get caught are kidding themselves.”

So regardless of how the rest of us may feel about tax evaders, what should someone with an offshore account do? There are two options: join the program or go it alone and take your chances. Here’s a look at the two options.

VOLUNTARY DISCLOSURE The main benefit of the second round of the I.R.S.’s offshore voluntary disclosure initiative is that people who come forward will not face criminal charges. They will owe a lot of penalties, but these may be less than if they were caught. (While the program officially ends on Sept. 9, the I.R.S. has said taxpayers who make a good-faith effort to comply may be able to file for an extension.) There are three groups of people for whom this program makes a lot of sense.

The first is people who inherited money from a relative in another country and kept it there. The penalty for inherited money is 5 percent of the account value, and paying this would save the person from a lengthy negotiation over a penalty that might end up being more. But there is one caveat: if, say, the person moved the inherited account from Italy, where the relative lived, to a bank in Switzerland, the I.R.S. could use that move as reason to increase the penalty to the full 25 percent because it was no longer a passive account.

In the second group are people who put the money offshore in better times and need it now. Gone are the days when banks would quietly accept large sums of money wired in from offshore accounts. Today, banks are required to file a suspicious activity report if money appears to be coming in from an undeclared account.

“They can’t just call their banker in Geneva and say, ‘Can you wire-transfer me $150,000?’ ” said Asher Rubinstein, a lawyer in New York who specializes in offshore tax issues. “So they’re saying, ‘Let me clean it up, make it compliant, and bring it here.’ ”

The third group is people who willfully hid money offshore to avoid paying taxes. If they are caught after the voluntary disclosure program ends, they could face penalties worse than Mr. Greeley’s.

NEGOTIATING The big difference from the last voluntary disclosure program is that this one is levying penalties on all assets kept abroad, not just financial assets.

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Higher Reserves Proposed for ‘Too-Big-to-Fail’ Banks

After nearly two years of political jousting, a panel of global regulators said on Saturday that banks deemed too-big-to-fail would have to set aside an additional cushion of capital reserves in what is the centerpiece of their efforts to avoid a repeat of the 2008 financial crisis.

The chief oversight group of the Basel Committee on Banking Supervision proposed that the world’s largest and most complex banks would need to hold a reserve of high-quality capital of between 1 and 2.5 percent of their assets to cope with any unforeseen losses. That would be on top of their proposed minimum capital levels for all banks, currently set at 7 percent of assets.

Regulators plan to impose the surcharge on a sliding scale, based on several factors including the bank’s size, complexity and the closeness of its ties to other large trading partners around the world.

And in what appears to be a nod to regulators pressing for even higher requirements, the committee proposed an additional surcharge on banks who grow larger or engage in risky activities that would “increase materially” the threat they pose to the financial system. The surcharge could raise the requirement to 3.5 percent of assets.

The process is only just beginning. The Basel committee will put out a more detailed proposal in late July, giving banks and policymakers a final chance to weigh in on the new rules before formally approving them. Then, regulators must begin the process of identifying these so-called “systemically important” global banks. The banks, meanwhile, will not have to fully comply with the new rules until January 2019.

The proposed capital requirements are perhaps the most important banking reform since the crisis erupted three years ago and are being followed closely in the world’s financial and political capitals. If banks are forced to hold bigger cushions of capital, they can more easily absorb financial shocks and avoid the need for taxpayer bailouts. But setting aside more capital means that banks also have less money available to lend out — a move that could dampen economic growth and potentially hinder an already anemic global recovery.

Amid aggressive lobbying by some of the largest banks for weaker capital requirements, international financial regulators have spent the last two years trying to strike the right balance. They also are trying to bridge different national standards, which might give countries with more favorable requirements a competitive advantage.

In a statement Saturday, the panel of regulators said the new measures would create strong incentives for large banks to curb risky behavior that could endanger the financial system. “This will contribute to enhancing the resiliency of the banking system and help mitigate the wider spill-over risks,” said Nout Wellink, a central banker from the Netherlands who is chairman of the Basel Committee.

American regulators pushed for a higher surcharge and better loss-absorbing capital, while European regulators, especially those in Germany and France, preferred a lower surcharge and broader definition of capital.

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DealBook: HSBC Settles Madoff Claims for $62.5 Million

HSBC agreed on Tuesday to pay $62.5 million to settle class action claims by investors in a fund that had invested with Bernard L. Madoff, who was jailed for fraud.

HSBC, which was named as a defendant in several lawsuits, serviced several funds outside the United States, including the Thema International Fund in Ireland, which invested assets with Mr. Madoff’s firm. HSBC had acted as a custodian and provided administration and other services, the banks said in a statement.

The settlement with the Thema fund investors is “without any admission of wrongdoing or liability,” said HSBC, one of Europe’s largest banks.

In 2009, Mr. Madoff was found guilty of running a huge Ponzi scheme. He is now serving a sentence of 150 years.

HSBC estimates that Thema investors lost about $312 million by investing with Mr. Madoff. Assets across all such funds totaled about $4.3 billion, the bank said.

The bank said the settlement covered the Thema fund. In regard to other Madoff-related claims, HSBC said it “has good defenses,” and it “will continue to defend the other Madoff-related proceedings vigorously.”

Irving H. Picard, the trustee for the victims of Mr. Madoff’s scheme, sued HSBC and some funds that invested with Mr. Madoff for $9 billion in December.

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