Litigation and Regulatory Matters

The following supplements, and should be read together with, the disclosure in Note 28, "Litigation and Regulatory Matters," in our 2018 Form 10-K. Only those matters with significant updates and new matters since our disclosure in our 2018 Form 10-K are reported herein.

In addition to the matters described below and in our 2018 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.

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 months ended March 31, 2019 and 2018, we recorded expense related to various legal matters of nil and $494 million, respectively. The expense in the 2018 period included expense related to a mortgage securitization matter that was settled in October 2018. See Note 28, "Litigation and Regulatory Matters," in our 2018 Form 10-K for additional discussion.

For the legal matters disclosed below, including litigation and governmental and regulatory matters, as well as for the legal matters disclosed in Note 28, "Litigation and Regulatory Matters," in our 2018 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 $400 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 ongoing investigations disclosed in Note 28, "Litigation and Regulatory Matters," in our 2018 Form 10-K, 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.

Foreign Exchange ("FX") Matters

FX Opt Out Litigation The plaintiffs filed an amended complaint on March 1, 2019, and the defendants' joint motion to dismiss was filed on April 1, 2019.

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 HSBC and certain of its affiliates, including HSBC Bank USA, along with a number of other firms, are being investigated by regulatory agencies in relation to trading on the foreign exchange market. The investigations involving HSBC Bank USA continue, including an investigation by the California Attorney General's Office. We are cooperating with the investigation.

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 have commenced Madoff-related proceedings against numerous defendants arising out of Madoff Securities' fraud.

In February 2019, the Second Circuit issued a decision reversing the November 2016 decision of the U.S. Bankruptcy Court for the Southern District of New York that had dismissed the majority of the remaining claims against the non-U.S. HSBC defendants in these actions on the bases of extraterritoriality and comity.

Benchmark Rate Litigation

CDOR: In March 2019, the court granted the defendants motion to dismiss. We anticipate that plaintiff will seek to amend the complaint or appeal the ruling.

Mortgage Securitization Trust Litigation In February 2019, Park Royal LLC filed a summons with notice in New York state court against HSBC Bank USA, as trustee for three residential mortgage-backed securities trusts, alleging the same misconduct that other plaintiffs have alleged against the trustee and seeking damages of $59 million. No complaint has yet been filed or served on HSBC Bank USA.

Shareholder Derivative Action Defendants HSBC, HSBC Bank USA, HSBC North America and HSBC USA's motion for reargument or, in the alternative, for leave to appeal to the New York Court of Appeals regarding the appellate court's reversal of the state court's dismissal was denied in March 2019.

Timothy O'Sullivan, et al. v. Deutsche Bank AG, et al. The court granted defendants’ motion to dismiss in March 2019. The second action filed in 2018 ("O'Sullivan II"), which is substantially similar to the first action, has been stayed based upon the parties' agreement.

Joel Tavera, et al. v. Deutsche Bank AG, et al. This action has been stayed based upon the parties' agreement.

James Donaldson v. HSBC Holdings plc, et al. This action has been stayed based upon the parties' agreement.

Kathleen Stephens v. HSBC Holdings plc, et al. This action has been stayed based upon the parties' agreement.

Ryan Bowman et al. v. HSBC Holdings plc, et al. In April 2019, a new action in the U.S. District Court for the Eastern District of New York was filed against HSBC Holdings plc, HSBC Bank plc, HSBC Bank Middle East Limited, and HSBC Bank USA, among other defendants. Designating the case as related to Charlotte Freeman, et al. v. HSBC Holdings plc, et al. the claims are based on allegations that Iranian payments were purportedly provided to terrorist organizations operating in Iraq. Plaintiffs allege violations of the Anti-Terrorism Act (18 U.S.C. §2331 et seq.). This action is at a very early stage.