(Bloomberg) — A former HSBC Holdings Plc trader sued the bank, claiming he was fired for warning management about its “epic” front-running problem and confronting a colleague about trading ahead of an order for Steve Cohen’s Point72 Asset Management.
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Stephen Callahan, who said he joined HSBC’s US rates trading desk as a director in 2021, claimed in a suit filed Tuesday in Manhattan federal court that he witnessed “rampant front-running, including directives to junior traders to ‘always’ prioritize the bank’s proprietary account.”
According to the suit, Callahan told his colleagues the practice was “unacceptable.” He claims HSBC responded by not promoting him, suspending him, withholding his annual bonus and then firing him in April for supposedly risky trades.
“We take claims like this very seriously and look forward to defending against these allegations in court,” Matt Ward, a spokesman for HSBC, said in a statement.
Callahan said he most often witnessed front-running in long-dated securities with maturities after 10 years, the more volatile prices for which made it easier for traders to profit from the practice. He said he provided his bosses with detailed accounts of the behavior, but that it continued regardless.
Shares of HSBC fell 2.4% on Wednesday morning in Hong Kong, taking this year’s decline to 17%.
Point72 Trades
On one occasion, Callahan said he heard another trader say, in front of the desk supervisor, that he was going to buy five-year securities in front of a client. Callahan claims he then told the desk supervisor that the practice was illegal and unacceptable.
In March 2022, the complaint alleges, a portfolio manager for Cohen’s $26 billion hedge fund asked HSBC to sell $100 million of long bonds at a certain time. Callahan’s desk manager instead sold the securities ahead of the deadline and then later filled the order for Point72 at the appointed time, generating “a significant profit for the bank” to the detriment of the fund, the lawsuit says.
Callahan claims he told the trader he should have given Point72 a better price given how much his earlier trade moved the market. According to the suit, the portfolio manager later complained to Callahan about the aggressive trading.
Tiffany Galvin-Cohen, a spokeswoman for Point72, declined to comment.
Front-running is the trading of securities and other asset classes by someone privy to information about a large impending transaction that will move prices.
HSBC separately won a UK case last year against a former client who had accused the bank’s traders of front-running over 15 years ago. A London judge ruled that currency investment firm ECU Group Plc brought the claims too late, saying it used the trial to make “colorful” allegations of widespread misconduct among HSBC’s FX traders without offering enough evidence.
Put on Leave
Callahan claims HSBC suspended him less than a week after he confronted his colleague about front-running Point72.
According to the suit, HSBC initially told Callahan a complaint had been lodged against him, then later said he was put on leave because the Chicago Mercantile Exchange had requested information about five of his trades. Callahan says in his suit that such information requests are routine in the industry, and traders are not usually put on leave because of them.
In April, he was fired, Callahan claims.
The suit is seeking lost wages, plus punitive damages and a $10,000 penalty. Callahan said he’s also filed a complaint with the Occupational Safety and Health Administration claiming HSBC violated whistleblower provisions of the 2002 Sarbanes-Oxley Act.
According to the suit, Callahan has been a trader for almost 30 years, including with Bear Stearns, Barclays and Morgan Stanley.
The case is Callahan v. HSBC Securities (USA) Inc., 22-cv-08621, US District Court, Southern District of New York (Manhattan).
(Updates with share price in seventh paragraph and separate HSBC case in 12th)
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