Litigation and Regulatory Matters

The following supplements, and should be read together with, the disclosure in Note 27, "Litigation and Regulatory Matters," in our 2017 Form 10-K and in Note 20, "Litigation and Regulatory Matters," in our Form 10-Q for the three month period ended March 31, 2018 (the "2018 First Quarter Form 10-Q"). Only those matters with significant updates and new matters since our disclosure in our 2017 Form 10-K and our 2018 First Quarter Form 10-Q are reported herein.

In addition to the matters described below and in our 2017 Form 10-K and our 2018 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.

Due to 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. During the three and six months ended June 30, 2018, we recorded expenses of $16 million and $510 million, respectively, related to various legal 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 2017 Form 10-K and in Note 20, "Litigation and Regulatory Matters," in our 2018 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 $325 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.

In addition, based on the facts currently known for each of the below investigations, as well as for the investigations disclosed in Note 27, "Litigation and Regulatory Matters," in our 2017 Form 10-K and in Note 20, "Litigation and Regulatory Matters," in our 2018 First Quarter Form 10-Q, 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. 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.

Credit Card Litigation In June 2018, the defendants, including the HSBC entities, reached an agreement in principle with counsel for the putative Federal Rule of Civil Procedure 23(b)(3) opt-out class, seeking monetary relief, to resolve all claims as filed in a third consolidated amended class action complaint in In re Payment Card Interchange Fee and Merchant Discount Antitrust Litigation, MDL 1720, E.D.N.Y. The settlement is subject to documentation of final settlement terms and court approval. If the settlement is finalized and approved, certain HSBC entities are responsible for a pro rata portion of the settlement amount, for which they are reserved, pursuant to the settlement and judgment sharing agreements entered into by the defendants.

County of Cook v. HSBC North America Holdings Inc., et al. Following the U.S. Supreme Court's decision in the City of Miami v. Bank of America Corp. & Wells Fargo & Co. case, the stay of the Cook County action was lifted and an amended complaint was filed in July 2017. In May 2018, the court granted in part and denied in part defendants’ motion to dismiss the amended complaint that was filed in August 2017. The court’s ruling on the motion to dismiss allows Cook County’s case to proceed, but significantly narrows the categories of damages available for potential recovery.

Foreign Exchange ("FX") Matters

U.S. Litigation In addition to the Consolidated Action that has been settled subject to final court approval (In re Foreign Exchange Benchmark Rates Antitrust Litigation; No. 13-CV-7789(LGS)), other putative class actions making similar allegations are pending against HSBC defendants, as well as other defendants, in the United States District Court for the Southern District of New York on behalf of: (1) ERISA plan participants (Allen v. Bank of America Corporation, et al.; No. 1:15-CV-4285); (2) retail customers (Nypl v. JPMorgan Chase, et al.; No. 1:15-CV-9300); and (3) “indirect purchasers” of FX (Contant v. Bank of America Corporation, et al.; No. 1:17-CV-03139). The Court of Appeals for the Second Circuit affirmed the U.S. district court's dismissal of the Allen action in July 2018. In the Contant action, plaintiffs have filed a motion for leave to amend in response to the court’s dismissal of the action in March 2018. It is possible that additional actions will be initiated against the HSBC entities, including HSBC Bank USA, in relation to their historical foreign exchange activities.

Investigations In August 2016, the U.S. Department of Justice ("DOJ") indicted two now-former HSBC employees and charged them with wire fraud and conspiracy relating to a 2011 foreign exchange transaction. One of the former employees was found guilty in October 2017, and has appealed his conviction.

Precious Metals Fix Matters

In re Commodity Exchange Inc., Gold Futures and Options Trading Litigation (Gold Fix Litigation) In July 2018, the court granted the motion to dismiss filed by the newly added non-HSBC defendant.

In re London Silver Fixing, Ltd. Antitrust Litigation (Silver Fix Litigation) In July 2018, the court granted the motion to dismiss filed by the newly added non-HSBC defendants.

Madoff Litigation

In 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, funds investors and the Madoff Securities trustee ("Trustee"), as described below) have commenced Madoff-related proceedings against numerous defendants arising out of Madoff Securities' fraud.

In one of the cases, SPV OSUS Ltd. v. HSBC Bank plc, HSBC Bank USA N.A., et al., HSBC USA Inc. removed the case to the federal district court in New York in April 2018. Defendants filed a motion to dismiss in July 2018.

Supranational, Sovereign and Agency ("SSA") Bonds The Superior Court of Justice action that was filed in the Province of Ontario, Canada has now lapsed; accordingly, the Federal Court action will proceed.

Benchmark Rate Litigation

In July 2018, defendants filed a motion to dismiss in the Canadian Dealer Offered Rate putative class action. Fire & Police Pension Association of Colorado, et al. v. Bank of Montreal, et al. (Case No. 18-cv-00342)

Mortgage Securitization Matters

In July 2018, HSBC North America and certain subsidiaries, including HSBC Bank USA, reached a settlement in principle to resolve the DOJ's ongoing investigation of their legacy residential mortgage-backed securities (“RMBS”) origination and securitization activities. The settlement in principle will resolve actual and potential civil claims by the DOJ relating to the RMBS activities of HSBC North America and certain of its subsidiaries from 2005 to 2007.

Under the terms of the settlement in principle, HSBC North America has agreed to pay a civil monetary cash penalty of $765 million, of which $492 million has been allocated to HUSI and is fully reserved as of June 30, 2018. Substantially all of the amount of this penalty was reserved for in the first quarter of 2018.

The settlement in principle is subject to the negotiation of definitive documentation, and there can be no assurance that the DOJ and the HSBC entities will agree on the final documentation of the settlement.

Separately, HSBC North America and certain subsidiaries, including HSBC Bank USA, have resolved the Massachusetts State Attorney General’s civil investigation of their legacy RMBS origination and securitization activities. The settlement will require HSBC North America to pay $26.8 million to the Attorney General, a portion of which has been allocated to HUSI and is fully reserved.

Residential Funding Litigation

We have settled for an amount within reserves.

Mortgage Securitization Trust Litigation

Since 2014, Plaintiff-Investors in 280 RMBS trusts have sued HSBC Bank USA, as mortgage securitization trustee, in a number of cases: BlackRock et al., Royal Park Investments SA/NV ("RPI"), Phoenix Light SF Limited, the National Credit Union Administration Board, as Liquidating Agent, Commerzbank AG, and Triaxx, IKB Bank AG, RMBS Recovery Holdings I LLC, et al., VRS Holdings 2 LLC and Reliance Standard Life Insurance Company. BlackRock’s and RPI’s motion for class certification has been denied, and the U.S. Court of Appeals for the Second Circuit denied a request for review of the decision.

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

In June 2018, the Office of the Comptroller of the Currency ("OCC") terminated the 2010 consent cease and desist order and the 2012 enterprise-wide compliance consent order after determining that HSBC Bank USA had satisfied the requirements of the respective orders. The 2010 consent cease and desist order entered into with the Federal Reserve Board by our parent, HSBC North America, and the second OCC consent order entered into in 2012 by HSBC Bank USA which, among other things, required the bank to correct the circumstances noted in the OCC’s report and imposed certain restrictions on HSBC Bank USA, still remain open.

Charlotte Freeman, et al. v. HSBC Holdings plc, et al. In July 2018, the magistrate judge issued ‎a recommendation that the court deny the defendants', including HSBC Bank USA’s, motion to dismiss.

Jeffrey Siegel, et al. v. HSBC Holdings plc, et al. In July 2018, ‎the court granted HSBC North America’s and HSBC Bank USA’s motion to dismiss.

Rigoberto Vasquez and Eva Garcia et al v. Hong Kong and Shanghai Banking Corporation Ltd., HSBC Bank USA, N.A., et al.

This putative class action was filed in the U.S. District Court for the Southern District of New York in March 2018 against HSBC Bank USA and the Hong Kong and Shanghai Bank Corporation and contains allegations similar to the Ramiro Giron, et al. v. Hong Kong and Shanghai Bank Corporation, Ltd., et al action. Plaintiffs purport to represent those that invested in a Ponzi scheme allegedly orchestrated by Phil Ming Xu and certain companies he allegedly controlled, such as WCM777. Hong Kong and Shanghai Banking Corporation is alleged to have accepted wire transfers from plaintiffs to WCM777 from investors in furtherance of the Ponzi scheme. HSBC Bank USA is alleged to have acted as Hong Kong and Shanghai Banking Corporation's correspondent bank for certain wire transfers to WCM777. The purported class period is from June 2013 to May 2014. Plaintiffs allege claims for Racketeer Influenced and Corrupt Organizations Act violations, aiding and abetting fraud, aiding and abetting breach of fiduciary duty, and aiding and abetting conversion. Plaintiffs seek compensatory damages in the amount of $37 million plus punitive damages, interest and attorneys' fees and costs.

Telephone Consumer Protection Act (“TCPA”) Litigation

In July 2018, the parties reached an agreement in principle to settle the action. The settlement is subject to documentation of final settlement terms and court approval.