Litigation and Regulatory Matters

The following supplements, and should be read together with, the disclosure in Note 28, "Litigation and Regulatory Matters," in our 2013 Form 10-K and our Form 10-Q for the three month period ended March 31, 2014 (the "2014 First Quarter 10-Q"). Only those matters with significant updates and new matters since our disclosure in our 2013 Form 10-K and our 2014 First Quarter Form 10-Q are reported herein.

In addition to the matters described below, and in our 2013 Form 10-K and our 2014 First Quarter Form 10-Q, in the ordinary course of business, we are routinely named as defendants in, or as parties to, various legal actions and proceedings relating to activities of our current and/or former operations. These legal actions and proceedings may include claims for substantial or indeterminate compensatory or punitive damages, or for injunctive relief. In the ordinary course of business, we also are subject to governmental and regulatory examinations, information-gathering requests, investigations and proceedings (both formal and informal), certain of which may result in adverse judgments, settlements, fines, penalties, injunctions or other relief. In connection with formal and informal inquiries by these regulators, we receive numerous requests, subpoenas and orders seeking documents, testimony and other information in connection with various aspects of our regulated activities.

In view of the inherent unpredictability of litigation and regulatory matters, particularly where the damages sought are substantial or indeterminate or when the proceedings or investigations are in the early stages, we cannot determine with any degree of certainty the timing or ultimate resolution of litigation and regulatory matters or the eventual loss, fines, penalties or business impact, if any, that may result. We establish reserves for litigation and regulatory matters when those matters present loss contingencies that are both probable and can be reasonably estimated. Once established, reserves are adjusted from time to time, as appropriate, in light of additional information. The actual costs of resolving litigation and regulatory matters, however, may be substantially higher than the amounts reserved for those matters.

For the litigation and governmental and regulatory matters disclosed below and in Note 28, "Litigation and Regulatory Matters," in our 2013 Form 10-K and in Note 19 "Litigation and Regulatory Matters" in our 2014 First Quarter Form 10-Q as to which a loss in excess of accrued liability is reasonably possible in future periods and for which there is sufficient currently available information on the basis of which management believes it can make a reliable estimate, we believe a reasonable estimate could be as much as $1.2 billion for HUSI and its U.S. affiliates. The litigation and governmental and regulatory matters underlying this estimate of possible loss will change from time to time and actual results may differ significantly from this current estimate.

Given the substantial or indeterminate amounts sought in certain of these matters, and the inherent unpredictability of such matters, an adverse outcome in certain of these matters could have a material adverse effect on our consolidated financial statements in particular quarterly or annual periods.

Litigation

Salveson v. JPMorgan Chase et al. (N.D.Cal. No. 13-CV-5816) On May 8, 2014, after being served with the complaint, HSBC filed a separate motion to dismiss, and both it and HNAH joined the joint motion to dismiss. On June 4, 2014, the Judicial Panel on Multidistrict Litigation transferred the case to the Eastern District of New York for consolidation with MDL 1720.

Credit Default Swap Litigation On May 23, 2014, defendants filed motions to dismiss plaintiffs’ second amended, consolidated complaint. The motion is fully briefed and pending.

Gold and Silver Fix Litigation

Since March 2014, numerous putative class actions have been filed in the US District Courts for the Southern District of New York, the District of New Jersey and the Northern District of California naming HSBC and a number of other members of The London Gold Market Fixing Ltd as defendants. The complaints allege that, from January 2004 to the present, defendants conspired to manipulate the price of gold and gold derivatives during the afternoon London gold fix in order to reap profits on proprietary trades. Plaintiffs have filed a motion for transfer with the Judicial Panel on Multi-District Litigation requesting assignment to and consolidation in the New York District Court. That motion is pending.

In July 2014, putative class actions were filed in the US District Court for the Southern and Eastern Districts of New York naming HSBC, HSBC Bank plc, HSBC Bank USA and the other members of The London Silver Market Fixing Ltd as defendants. The complaints allege that, from January 2007 to the present, defendants conspired to manipulate the price of physical silver and silver derivatives for their collective benefit in violation of the US Commodity Exchange Act and US antitrust laws. These actions are at a very early stage.

Based on the facts currently known, it is not practicable at this time for us to predict the resolution of these private lawsuits, including the timing and potential impact on us.

Madoff Litigation

In December 2008, Bernard L. Madoff ("Madoff") was arrested for running a Ponzi scheme and a trustee was appointed for the liquidation of his firm, Bernard L. Madoff Investment Securities LLC ("Madoff Securities"), an SEC-registered broker-dealer and investment adviser. Various non-U.S. HSBC companies provided custodial, administration and similar services to a number of funds incorporated outside the United States whose assets were invested with Madoff Securities. Plaintiffs (including funds, funds investors and the Madoff Securities trustee) have commenced Madoff-related proceedings against numerous defendants in a multitude of jurisdictions. Various HSBC companies have been named as defendants in suits in the United States, Ireland, Luxembourg and other jurisdictions. Certain suits (which include U.S. putative class actions) allege that the HSBC defendants knew or should have known of Madoff's fraud and breached various duties to the funds and fund investors.

In re Herald, Primeo and Thema Funds Securities Litigation On May 28, 2014, after the United States Supreme Court decided Chadbourne & Park LLP v. Troice, 134 S. Ct. 1058 (2014), the Second Circuit denied Thema International Fund plc’s petition for panel rehearing following its affirmance of the district court’s dismissal of all U.S. class action claims against the HSBC defendants on forum non conveniens grounds. The petition for rehearing en banc remains pending.

The Madoff Securities trustee filed a suit in the U.S. captioned Picard v. HSBC et al (Bankr S.D.N.Y. No. 09-01364), which also names certain funds, investment managers, and other non-HSBC entities and individuals, seeking $9 billion in damages and additional recoveries from HSBC Bank USA, certain of our foreign affiliates and the various other non-HSBC co-defendants. In July 2011, the district court dismissed the trustee's various common law claims, which in total account for approximately $6.6 billion of the potential exposure in the action, on the grounds that the trustee lacked standing to assert them, and the Court of Appeals affirmed that decision in June 2013. On June 30, 2014, the Supreme Court denied the trustee’s petition for a writ of certiorari of the Court of Appeal’s decision. The dismissal of the trustee’s common law claims is now final.

The district court previously returned the trustee's bankruptcy claims to the bankruptcy court for further proceedings, but retained certain issues for further consideration. These claims seek the return of the transfers of funds from Bernard L. Madoff Investment Securities LLC (“Madoff Securities”) to the feeder fund defendants as well as subsequent transfers of those assets from the feeder funds to other defendants, including the HSBC defendants, as preferential and fraudulent transfers under U.S. bankruptcy law. As to the HSBC defendants, which include HSBC Bank USA, the claims seek recovery of unspecified amounts that the HSBC defendants received from funds invested with Madoff, including amounts that the HSBC defendants received when they redeemed units held in the various funds. On July 7, 2014, the district court ruled that the U.S. bankruptcy code does not provide the trustee the right to recover money that was transferred between foreign entities, even if that money ultimately is traceable to Madoff Securities. This decision is subject to appeal and has not been applied to the facts of the trustee’s case against the HSBC defendants, so its impact on the trustee’s remaining claims is uncertain.

There are many factors that may affect the range of possible outcomes, and the resulting financial impact, of the various Madoff-related proceedings including, but not limited to, the circumstances of the fraud, the multiple jurisdictions in which proceedings have been brought and the number of different plaintiffs and defendants in such proceedings. For these reasons, among others, we are unable to reasonably estimate the aggregate liability or ranges of liability that might arise as a result of these claims but they could be significant. In any event, we consider that we have good defenses to these claims and will continue to defend them vigorously.

Benchmark Rate Litigation In May 2014 HSBC, HSBC Bank plc, HSBC USA and HSBC Finance, along with the other U.S. dollar Libor panel banks, were named as defendants in a lawsuit filed by two mutual funds managed by Prudential Investment Portfolios seeking unspecified damages as a result of alleged artificial suppression of U.S. dollar Libor rates which plaintiffs allege resulted in plaintiffs receiving substantially less interest payments in connection with certain transactions entered into with the defendants. Additionally, the Federal Deposit Insurance Corporation, in its role as receiver for several failed banks, filed a complaint against the British Bankers Association and the U.S. dollar Libor panel banks, including HSBC, HSBC Bank USA, and The Hongkong and Shanghai Banking Corporation, seeking unspecified damages as a result of fraudulent artificial suppression of U.S. dollar Libor rates. These actions have been transferred and/or consolidated with a U.S. dollar Libor Multi-District Litigation proceeding in the U.S. District Court for the Southern District of New York. HSBC and HSBC Bank plc are defendants in that proceeding as well. These actions are subject to a stay imposed by the court.

Mortgage Securitization Activity and Litigation

In addition to the repurchase risk described in Note 17, "Guarantee Arrangements and Pledged Assets," HSBC Bank USA has also been involved as a sponsor/seller of loans used to facilitate whole loan securitizations underwritten by HSI. During 2005-2007, HSBC Bank USA purchased and sold $24 billion of whole loans to HSI which were subsequently securitized and sold by HSI to third parties. The outstanding principal balance on these loans was approximately $6.1 billion and $6.5 billion at June 30, 2014 and December 31, 2013, respectively.

Participants in the U.S. mortgage securitization market that purchased and repackaged whole loans have been the subject of lawsuits and governmental and regulatory investigations and inquiries, which have been directed at groups within the U.S. mortgage market, such as servicers, originators, underwriters, trustees or sponsors of securitizations, and at particular participants within these groups. As the industry's residential mortgage foreclosure issues continue, HSBC Bank USA has taken title to a number of foreclosed homes as trustee on behalf of various securitization trusts. As nominal record owner of these properties, HSBC Bank USA has been sued by municipalities and tenants alleging various violations of law, including laws regarding property upkeep and tenants' rights. While we believe and continue to maintain that the obligations at issue and any related liability are properly those of the servicer of each trust, we continue to receive significant and adverse publicity in connection with these and similar matters, including foreclosures that are serviced by others in the name of "HSBC, as trustee."

Federal Housing Finance Agency, as Conservator for the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation v. HSBC North America Holdings Inc. et al. (S.D.N.Y. No. CV 11-6189-LAK) Various defendants' motions for summary judgment and other applications have been fully briefed and are currently pending before the court. Expert discovery is scheduled to continue through August 2014. The aggregate unpaid principal balance of the securities was approximately $1.5 billion and $1.6 billion at June 30, 2014 and December 30, 2013, respectively.

In June 2014, the Deutsche Zentral-Genossenschaftsbank AG, New York Branch v. HSBC North America Holdings Inc., et al (S.D.N.Y. No. 12-CV-4025) and Bayerische Landesbank v HSBC Holdings plc, et al. (Index No. 65481/12) matters each were resolved by a confidential settlement among the parties. The settlements did not have a material impact on our results.

In May 2014 Commerzbank AG London Branch filed a complaint against nearly 70 different financial institutions, including HSBC, HSI and HSI Asset Securitization Corporation, seeking unspecified damages as a result of alleged fraud and fraudulent concealment committed by the defendants in the securitization of residential mortgages and the sale of those securities to the plaintiff. Commerzbank had previously filed a summons with notice against the same defendants in December 2013. This action is at an early stage.

In June 2014, a lawsuit was filed in New York State court against HSBC Bank USA, as trustee of approximately 264 identified trusts (the "Trusts"). Similar lawsuits were filed simultaneously against other non-HSBC financial institutions that served as mortgage securitization pool trustees. The plaintiffs are investors in the Trusts and include, among others, BlackRock and PIMCO funds. The lawsuits were brought derivatively on behalf of the Trusts. The complaint against HSBC Bank USA alleges that the Trusts have sustained losses in collateral value of over $32 billion. The lawsuit seeks unspecified damages resulting from an alleged breach of the Trust Indenture Act, breach of fiduciary duties, and negligence. This action is at an early stage.

Shareholder Derivative Action On May 7, 2014 a shareholder of HSBC (who is not a shareholder of HSBC Bank USA, HNAH or HSBC USA) filed a shareholder derivative action, captioned Michael Mason-Mahon v. Douglas J. Flint, et al. (New York State Supreme Court, Nassau County, Index No. 602052/2014), purportedly on behalf of HSBC, HSBC Bank USA, HNAH and HSBC USA in New York State Supreme Court against the directors, certain officers and certain former directors of those HSBC companies alleging that those directors and officers breached their fiduciary duties to the companies and caused a waste of corporate assets by allegedly permitting and/or causing the conduct underlying the DPA. This action is at a very early stage, but the ultimate outcome of the action is not expected to have a material impact on HUSI.