Callahan v. HSBC Holdings plc

Background

Stephen Callahan alleged that HSBC Securities (USA) Inc. retaliated against him after he reported that HSBC traders were engaging in “front-running”—using advance, non-public knowledge of pending customer orders to trade for the bank’s own account. Callahan alleged that he reported the conduct to HSBC supervisors and managers between September 2021 and February 2022, notified an attorney with the Commodity Futures Trading Commission in early March 2022, and offered additional information to HSBC attorneys in April 2022.

According to the First Amended Complaint, HSBC denied Callahan a promised promotion in December 2021, suspended him and withheld his bonus in March 2022, fired him on April 5, 2022, and later filed a negative Form U5 with the Financial Industry Regulatory Authority. Callahan asserted retaliation claims under Section 806 of the Sarbanes-Oxley Act, codified at 18 U.S.C. § 1514A, and under Section 740 of the New York Labor Law.

HSBC moved to dismiss under Federal Rules of Civil Procedure 12(b)(1) and 12(b)(6). Rule 12(b)(1) concerns the court’s power to hear a claim, while Rule 12(b)(6) tests whether the complaint alleges enough facts to state a legally plausible claim.

SOX Claims Based on the Promotion, Suspension, and Bonus

The court held that SOX requires an employee to first file an administrative complaint with the Secretary of Labor, whose responsibility for these claims has been delegated to the Occupational Safety and Health Administration. The employee must file that complaint within 180 days after the alleged violation or learning of it.

Callahan filed his OSHA complaint on September 30, 2022. The court determined that his failure-to-promote claim, suspension claim, and bonus claim were based on actions occurring more than 180 days before that filing. The court also rejected the argument that these separate actions formed a continuing violation that extended the filing deadline. It therefore concluded that it lacked subject-matter jurisdiction over those three SOX claims and granted HSBC’s Rule 12(b)(1) motion as to them.

SOX Claims Based on Termination and the Form U5 Filing

The court denied HSBC’s Rule 12(b)(6) motion as to Callahan’s SOX claims based on his termination and HSBC’s negative Form U5 filing. To state a SOX retaliation claim, Callahan had to plausibly allege protected reporting, HSBC’s knowledge of that reporting, an unfavorable employment action, and that the reporting was a contributing factor in the action.

The court found that Callahan adequately alleged a reasonable belief that the trading activity was illegal front-running. The allegations included his direct observations of trades, overheard conversations, discussions with other employees, a customer complaint, and his knowledge of HSBC’s institutional history of front-running. The court also found that his reports to HSBC supervisors and managers adequately alleged HSBC’s knowledge of protected activity.

For the termination claim, the court applied the standard that protected activity need only be a contributing factor in the adverse action; Callahan did not need to show that it was the sole or overriding reason. The court found sufficient allegations of timing, possible pretext in HSBC’s explanation, inconsistent application of policies, and different treatment compared with other employees. It concluded that the complaint plausibly alleged that the CME information request may have provided a pretext for retaliation.

The court also found that Callahan plausibly alleged a SOX retaliation claim based on the negative Form U5 filing. Although the filing was compulsory under Financial Industry Regulatory Authority rules, the court concluded that the filing and its contents were closely connected to Callahan’s termination and the circumstances leading to it.

New York Labor Law Section 740 Claims

The court applied the current version of New York Labor Law Section 740 to all of Callahan’s claims, including his promotion claim arising before the 2021 amendments took effect. The court concluded that the amendments had a remedial purpose and should apply retroactively.

Section 740 prohibits retaliation against an employee who reports activity that the employee reasonably believes violates a law, rule, or regulation. The court found that Callahan plausibly alleged protected activity, adverse action, and a causal connection for each challenged action. It therefore denied HSBC’s Rule 12(b)(6) motion as to Callahan’s claims based on his termination, Form U5 filing, failure to promote, suspension, and withheld bonus.

Disposition

The court’s order states that HSBC’s motion to dismiss was “GRANTED IN PART and DENIED IN PART.” The court granted the Rule 12(b)(1) motion to dismiss Callahan’s SOX promotion, suspension, and bonus claims. It denied the Rule 12(b)(6) motion to dismiss the SOX termination and Form U5 claims and denied the motion as to all of Callahan’s Section 740 retaliation claims. HSBC was ordered to answer the First Amended Complaint within 21 days of the opinion and order.