HSBC has been taken to Court over its allegedly retaliatory actions against a trader who claims he has seen multiple instances of front-running.

Stephen Callahan filed a complaint against HSBC Securities (USA) Inc., HSBC North America Holdings Inc. and HSBC Holdings plc on October 11, 2022 in the New York Southern District Court.

In 2021, Callahan joined HSBC as a trader. He claims that he witnessed rampant front-running, including directives to junior traders to “always” prioritize the Bank’s proprietary account.

He saw traders with non-public knowledge of impending orders routinely trade for the Bank’s proprietary account ahead of placing a client’s order to influence the price of the security, such that the Bank would maximize its upside and minimize its downside at the expense of the customer.

Front-running is a violation of Section 10(b) of the Securities Exchange Act of 1934, Exchange Act Rules 10b-5(a) and (c), and Financial Industry Regulatory Authority (FINRA) Rule 5720, among other laws and rules.

Callahan observed front-running most frequently with “long end” securities (those on the yield curve of more than ten years) where there is more price volatility, making it easier for traders to move the price so that they can buy from, or sell to, the customer to garner a profit, or limit a loss for the Bank.

For example, Callahan noticed that HSBC traders would routinely prevent prices from being auto quoted because the auto quotes on the “long end” were lower than the rest of the market, and traders wanted to be able to move the price of the security to bid or offer at a lower price than the auto quote.

Callahan protested, warning junior traders that front-running was unlawful and repeatedly complaining to management about the “epic” front-running problem. HSBC promptly retaliated against Callahan by failing to promote him, suspending him, withholding his annual bonus and ultimately firing him.

According to the plaintiff, HSBC’ conduct violated New York Labor Law § 740 which prohibits an employer from taking any retaliatory action against an employee, including suspension or termination, because the employee disclosed, or threatened to disclose, the employer’s unlawful activity.

The trader prays that the Court enter judgment in his favor and against HSBC, containing the following relief:

• An injunction to restrain continued violations of NYLL § 740;
• Reinstatement, including full fringe benefits and seniority rights;
• Compensation for lost wages, benefits and other remuneration;
• An award of punitive damages;
• A payment of reasonable costs, disbursements, and attorneys’ fees;
• Prejudgment interest on all amounts due;
• A civil penalty of an amount not to exceed ten thousand dollars; and
• Such other and further relief as the Court may deem just and proper.

HSBC has a history of engaging in front-running—the unlawful practice of using non-public client information to trade for the Bank’s “proprietary” account to the detriment of its own customers. Indeed, in 2018, the Bank paid more than $100 million to resolve criminal allegations involving a front-running scheme that enabled HSBC to acquire millions of dollars to benefit the institution and harm its clients.”