NEW YORK-Banking giant HSBC USA Inc. is suing five insurers for refusing to pay a $100 million fidelity claim arising from a 1990s investment fraud that cost the bank more than $500 million in restitution payments and that put one of its securities brokerage units out of business.

HSBC and a dormant brokerage subsidiary, Republic New York Securities Corp., filed the suit this month in U.S. District Court in New York against Lloyd's of London underwriters and several other insurers.

The complaint seeks a ruling that the insurers are liable for the $100 million limit of Republic's fidelity program for losses stemming from a promissory note scheme in which money manager Martin A. Armstrong, aided by Republic employees, allegedly defrauded dozens of Japanese investors.

Mr. Armstrong is currently in jail awaiting trial on federal securities fraud and other charges.

HSBC and Republic paid $569 million in restitution to injured investors in 2002 as part of a settlement with the Securities and Exchange Commission that also resulted in revocation of Republic's broker/dealer registration.

HSBC's lawsuit does not describe the grounds insurers have cited for denying the fidelity claim. None of the insurers has yet answered the complaint, and their representatives have declined to comment on the dispute.

New York-based HSBC USA acquired its troubles with Mr. Armstrong when it bought out banking rival Republic New York Corp. and its securities brokerage unit in 1999. Four years earlier, Mr. Armstrong and his now-defunct investment management operation, Princeton Economics International Inc., had become key Republic brokerage clients.

Holding himself out as an expert money manager, Mr. Armstrong sold billions of dollars of Princeton notes to Japanese investors. The notes were issued by special-purpose vehicles that Mr. Armstrong incorporated in the Turks & Caicos Islands under the "Princeton Global Management" name; he was to invest the proceeds of the SPV note sales through segregated brokerage accounts at Republic, with the proceeds used to pay either variable- or fixed-rate returns to investors.

Mr. Armstrong's business generated $35 million in commissions and fees for Republic's futures trading division from 1995 to 1999, accounting for virtually all of the division's revenues and making it the most profitable sector of Republic's brokerage unit, according to SEC documents.

While Mr. Armstrong told investors that he would invest the note proceeds conservatively in U.S. government bonds, though, he actually engaged in risky currency, metals and futures and options trading that had generated net losses of $550 million by 1999, the SEC found in a 2001 administrative proceeding.

As the losses piled up, Republic officials continually helped Mr. Armstrong conceal the funds' actual performance, according to HSBC's lawsuit, which echoes the earlier SEC findings.

Between November 1995 and July 1999, for example, a top officer of Republic's futures division and several other Republic employees issued more than 200 letters that falsely reported the net asset value of various Princeton SPV accounts, HSBC alleges. In some cases, the letters were "completely false," the suit says. In others, Republic officials transferred funds from one SPV account to another to bring balances up to the reported levels, even though investors had been told the funds of the various SPVs would not be commingled, according to the complaint.

Rather than allocating trades to the proper Princeton SPV accounts, Republic officials also allowed Mr. Armstrong to set up separate trading accounts and improperly aggregate those accounts with the SPVs', effectively offsetting "massive deficit balances" in the trading accounts with the collateral in the SPV accounts in violation of Republic and New York Mercantile Exchange rules, the suit says.

Republic officers also used segregated SPV funds in a number of improper ways, transferring money out of the accounts to NYMEX to cover Mr. Armstrong's trading account losses; using money from one SPV account to pay noteholders of another SPV; and allowing Mr. Armstrong to divert funds for his own use, HSBC charges.

The bank discovered the alleged fraud in an internal investigation in 1999, before its sale to HSBC, and notified federal prosecutors and the SEC, according to the suit. Mr. Armstrong was indicted soon afterwards on conspiracy, securities fraud and wire fraud charges and is awaiting trial. Though he pleaded not guilty and was released on bond, he has been held since January 2000 in a federal jail in New York City on a contempt of court charge for failing to turn over assets to Princeton's receiver.

Meanwhile, HSBC-which negotiated a minimum $450 million reduction in Republic's purchase price because of the Princeton scandal-filed its suit against its fidelity insurers to recover part of the $569 million in restitution it paid noteholders.

In addition to Lloyd's, insurers participating in the $100 million comprehensive crime coverage were Travelers Casualty & Surety Co. of America and affiliate Gulf Insurance Co., Chubb Corp.'s Federal Insurance Co. unit, and the Continental Casualty Co. unit of CNA Financial Corp.

The complaint does not say what part of the limit each insurer wrote, and lawyers familiar with the dispute declined to comment.

HSBC's lawsuit quotes the program's insuring agreement, which covers "loss resulting directly from dishonest or fraudulent acts committed by an employee acting alone or in collusion with others." The dishonest acts must be committed with the intent to cause the bank a loss or to "obtain financial benefit for the employee or another person or entity."

HSBC filed a claim with the insurers for its restitution losses and for defense costs that totaled $14.4 million as of the end of 2001. The insurers refused to pay the claim, though, and "wrongly contend that the policy denies coverage" for the losses, according to the lawsuit.

Along with a declaratory judgment that the claim is covered, HSBC seeks damages for breach of contract and payment of defense costs.