Litigation and Regulatory Matters

The following supplements, and should be read together with, the disclosure in Note 27, "Litigation and Regulatory Matters," in our 2015 Form 10-K. Only those matters with significant updates and new matters since our disclosure in our 2015 Form 10-K are reported herein.

In addition to the matters described below, and in our 2015 Form 10-K, 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 legal matters, including litigation, governmental 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 such matters or the eventual loss, fines, penalties or business impact, if any, that may result. We establish reserves for litigation, governmental 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 legal matters disclosed below, including litigation and governmental and regulatory matters, as well as for the legal matters disclosed in Note 27, "Litigation and Regulatory Matters," in our 2015 Form 10-K 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 $125 million for HUSI. The legal matters underlying this estimate of possible loss will change from time to time and actual results may differ significantly from this current estimate.

Based on the facts currently known, in respect of each of the below investigations, it is not practicable at this time for us to determine the terms on which these ongoing investigations will be resolved or the timing of such resolution or for us to estimate reliably the amounts, or range of possible amounts, of any fines and/or penalties. As matters progress, it is possible that any fines and/or penalties could be significant.

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 any particular quarterly or annual period.

Salveson v. JPMorgan Chase et al. (N.D.Cal. No. 13-CV-5816) On February 24, 2016, the court denied plaintiffs’ motion for reconsideration of the motion to dismiss and granted defendants’ motion for reconsideration, dismissing the state law claim on substantive grounds. Plaintiffs have appealed that decision.

Checking Account Overdraft Litigation At the final settlement approval hearing held on April 6, 2016, the state court indicated that an order and decision on final approval would be forthcoming.

Credit Default Swap Matters

On April 18, 2016, the U.S District Court for the Southern District of New York issued an order granting final approval of the settlement in In re CDS Antitrust Litigation.

Interest Rate Swaps Litigation

HSBC Bank USA, HSI, and HSBC Bank plc have been named as defendants, among others, in a putative class action brought in the U.S. District Court for the Southern District of New York relating to interest rate swaps. Public School Teachers’ Pension and Retirement Fund of Chicago and Mayor and City Council of Baltimore, on behalf of themselves and others similarly situated v. Bank of America Corporation, et al. The action alleges that the defendants conspired to restrain trade in violation of the federal anti-trust laws by, among other things, restricting access to interest rate swap pricing exchanges and blocking new entrants into the exchange market, with the purpose and effect of artificially inflating the bid/ask spread paid to buy and sell interest rate swaps in the United States. This matter is at a very early stage.

Precious Metals Fix Matters

In re Commodity Exchange Inc., Gold Futures and Options Trading Litigation (Gold Fix Litigation) The motion to dismiss was argued in April 2016. We await the court's decision.

In re London Silver Fixing, Ltd. Antitrust Litigation (Silver Fix Litigation) The motion to dismiss was argued in April 2016. We await the court's decision.

In April 2016 two putative class action “Notices of Action” were filed in the Superior Court of Justice, Provinces of Ontario and Quebec, Canada, against, among others, HSBC, HSBC Bank plc, HSBC USA, HSI, HSBC Bank Canada and HSBC Securities Canada. The Notices of Action allege, among other things, that defendants conspired to manipulate the price of silver and silver derivatives during the London Silver Fix. These actions are in the early stages.

Madoff Litigation

In December 2008, Bernard L. Madoff ("Madoff") was arrested and ultimately pleaded guilty to 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, fund investors and the Madoff Securities trustee, as described below) have commenced Madoff-related proceedings against numerous defendants in many jurisdictions arising out of Madoff Securities’ fraud.

Defendants’ motion to dismiss the Hau Yin To v. HSBC Bank plc, et al. (Case No. 15-CV-3590) action is fully briefed.

Beginning in October 2009, Fairfield Sentry Limited, Fairfield Sigma Limited and Fairfield Lambda Limited ("Fairfield"), funds whose assets were directly or indirectly invested with Madoff Securities, commenced multiple suits in the British Virgin Islands ("BVI") and the United States against numerous fund shareholders, including various HSBC companies that acted as nominees for clients of HSBC's private banking business and other clients who invested in the Fairfield funds, seeking restitution of payments made in connection with share redemptions. In March 2016, the BVI court denied a motion filed by other defendants challenging the Fairfield liquidator’s authorization to pursue claims in the United States. Those defendants have appealed the BVI court's decision denying their motion.

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. The timing and resolution of these matters remains uncertain. It is possible that any liabilities that may arise as a result 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 March 2016, defendants’ motion to dismiss was denied in the consolidated actions brought in the U.S. District Court for the Southern District of New York on behalf of persons who transacted in interest rate derivative transactions or purchased or sold financial instruments that were either tied to U.S. dollar International Swaps and Derivatives Association fix ("ISDAfix") rates or were executed shortly before, during, or after the time of the daily ISDAfix setting window. HSBC Bank USA is the only named HSBC entity.

Mortgage Securitization Matters

In addition to the repurchase risk described in Note 18, "Guarantee Arrangements, Pledged Assets and Repurchase Agreements," 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 $5.0 billion and $5.2 billion at March 31, 2016 and 2015, 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. We expect activity in this area to continue. As a result, we may be subject to additional claims, litigation and governmental and regulatory scrutiny related to our participation in the U.S. mortgage securitization market, either individually or as a member of a group. 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."

HSBC Bank USA and certain of our affiliates have been named as defendants in a number of actions in connection with residential mortgage-backed securities offerings, which generally allege that the offering documents for securities issued by securitization trusts contained material misstatements and omissions, including statements regarding the underwriting standards governing the underlying mortgage loans.

HSBC Bank USA appealed the denial of its motion to dismiss in the action filed by Deutsche Bank National Trust Company as Trustee of HASCO 2007-NC1, in New York County Supreme Court, State of New York, against HSBC Bank USA.

We expect these types of claims to continue. As a result, we may be subject to additional claims, litigation and governmental and regulatory scrutiny related to our participation in the U.S. mortgage securitization market, either individually or as a member of a group.

Anti-Money Laundering, Bank Secrecy Act and Office of Foreign Assets Control Matters

Alfredo Villoldo, et al. v. HSBC Bank USA, N.A., et al. The U.S. Court of Appeals for the Second Circuit affirmed on appeal the decision granting the HSBC defendants’ motion to dismiss.

Ramiro Giron, et al. v. Hong Kong and Shanghai Bank Company, Ltd., et al. The HSBC defendants’ motion to dismiss is fully briefed.

Telephone Consumer Protection Act Litigation

In April 2016, a putative class action entitled Monteleone v. HSBC Finance Corporation, et al.was filed in the United States District Court for the Northern District of Illinois against HSBC Finance, HSBC Mortgage Corporation, HSBC Mortgage Services Inc., HSBC Bank USA and HTSU. The action alleges that the HSBC defendants contacted plaintiff, or the members of the class he seeks to represent, on their cellular telephones using an automatic telephone dialing system or an artificial or prerecorded voice, without prior express consent, in violation of the Telephone Consumer Protection Act, 47 U.S.C. §227 et seq. Plaintiff seeks statutory damages of at least $500 for each violation. This action is at a very early stage.