LONDON (Bloomberg) - Bermuda-based Alpha Prime Fund Ltd and Senator Fund SPC, two funds sued along with HSBC Holdings Plc by the trustee liquidating Bernard Madoff’s firm, filed so-called cross claims against HSBC to try to recoup damages they incurred in the fraud.HSBC, which acted as custodian for the funds, failed in its duty to monitor Madoff and profited from his Ponzi scheme at their expense, Alpha Prime and Senator Fund said in a filing. The London-based bank is therefore “liable for any damages accrued by” the funds, they said in the May 27 filing in US Bankruptcy Court in Manhattan.HSBC is “the direct cause of the loss of hundreds of millions of Alpha Prime’s dollars and tens of millions of Senator Fund’s dollars,” they said.Irving Picard, the Madoff firm’s trustee, sued HSBC and a dozen feeder funds for $9 billion in December, saying they should have known of the fraud. HSBC, Europe’s biggest lender, has asked a district court judge in New York to dismiss Picard’s suit, saying it didn’t know of the fraud and lost $1 billion of its own money investing in funds that in turn put money with Madoff.The tax and advisory firm KPMG LLP told HSBC about the risks of Madoff’s business in 2006 and 2008, according to copies of the reports obtained by Bloomberg, which was allowed access to them on the condition they not be published.KPMG identified 25 “fraud and related operational risks” in the way Madoff received, checked and accounted for client funds, it said in a 56-page report dated February 16, 2006, more than two years before the fraud came to light.The limited controls in place “may not prevent fraud or error occurring on client accounts if management or staff at Madoff LLC either override controls or undertake activities where appropriate controls are not in place,” according to the report.In an e-mailed statement to Bloomberg in March, HSBC said that “KPMG did not conclude in either of its reports that a fraud was being committed by Madoff. HSBC did not know that a fraud was being committed and lost $1 billion of its own assets as a victim,” the bank said.According to Alpha Prime and Senator Fund, HSBC failed to verify trades reported by Madoff, even though that was its duty as custodian. If the bank had done so, it “would have seen that trades were allegedly executed at prices outside the daily range of prices of such securities on the days in question,” the funds said.“HSBC misled Alpha Prime and Senator Fund to believe that they were complying with these obligations,” they said in the filing. The funds said they were told on December 5, 2008, about a week before Madoff’s arrest, that the bank had started to receive copies of trade tickets from Madoff and to try to replicate the trades.Answering Picard’s case against them, the two funds said they were investment funds, not feeder funds. They received money from Madoff in good faith and weren’t obliged to return it, they said.Picard’s suit against Bermuda-based Alpha Prime seeks to recover $213 million.HSBC spokesman Patrick Humphris and spokeswoman Juanita Gutierrez didn’t immediately respond to an e-mail seeking comment.Madoff is serving a 150-year sentence in federal prison in North Carolina.The case is Picard v. Alpha Prime, 09-01364, US Bankruptcy Court, Southern District of New York (Manhattan).