A proposed $62.5 million partial settlement between HSBC Holdings and the investors in an Irish fund that lost their money in Bernard Madoff’s Ponzi scheme was rejected by a federal judge in Manhattan.

BloombergUS District Judge Richard Berman in Manhattan said at a hearing yesterday that he won’t grant tentative approval to the settlement, announced in June, saying it’s “not fair, reasonable or adequate, even at this preliminary stage,” to the investors in the fund, Thema International Fund

The investors sued Thema and other defendants, including HSBC, which acted as Thema’s custodian, in January 2009. The investors are seeking to represent all Thema investors who lost money when Madoff’s scheme was exposed in December 2008.

They claim the bank should have known Madoff was a fraud.

Among the “obvious deficiencies” Berman identified in denying approval was a provision that would have set aside $10 million to pay the fees and expenses of the investors’ lawyers in pursuing claims against non-settling defendants outside the country.