Tag: Insider trading

New York Federal Judge Denies Susquehanna’s Bid to Freeze $100 Million in Alleged Insider Trading Case

A U.S. District Court judge in Manhattan has rejected an attempt by Susquehanna Securities and Susquehanna Investment Group to freeze nearly $100 million linked to dozens of traders accused of profiting from nonpublic information ahead of a Chinese regulatory crackdown on cross-border trading platforms.

Lawsuit Background and Allegations

Susquehanna filed the lawsuit on June 29 against 100 unnamed defendants, alleging violations of Section 20A of the Securities Exchange Act of 1934 and unjust enrichment. Citadel Securities later joined the case as an intervenor. The dispute centers on trading activity preceding a May 22 announcement by the Chinese government targeting cross-border brokerage services offered to mainland investors without regulatory approval.

The market maker alleged that the defendants traded using material nonpublic information before the news triggered a sharp decline in certain securities. Susquehanna initially targeted 100 defendants but narrowed its request for a preliminary injunction to 40, seeking to prevent them from transferring, encumbering, or disposing of proceeds held at third-party brokerage firms. As an alternative, the company requested an attachment order to seize assets to secure a potential judgment.

Court Finds No Irreparable Harm to Justify Asset Freeze

In a September 14 opinion and order, Judge Arun Subramanian ruled that Susquehanna had not demonstrated a likelihood of irreparable harm without a preliminary injunction. The judge found insufficient evidence that the defendants were likely to dissipate or conceal assets before a judgment could be enforced.

Susquehanna argued that the defendants’ allegedly suspicious trading created a significant risk that proceeds could be moved beyond the court’s reach. Subramanian rejected this reasoning, stating that accepting it would effectively allow asset freezes as a matter of course in many insider trading or fraud cases.

The court analyzed three groups separately: domestic defendants, foreign defendants who had appeared in the case, and foreign defendants who had not appeared. For domestic defendants, the judge found no evidence that their failure to appear indicated an intent to frustrate enforcement, noting some may not have been formally served. Regarding foreign defendants, the court held that the potential difficulty of enforcing a judgment overseas does not, by itself, establish irreparable harm.

Susquehanna did not identify a pattern of defendants hiding funds, making fraudulent transfers, or engaging in evasive conduct. Some foreign defendants who appeared submitted evidence showing they had sufficient funds to satisfy a potential judgment.

The company came closest to establishing risk regarding one defendant, identified as John Doe 3, who allegedly removed more than $10 million from a relevant account before a freeze took effect. The court found the claim lacked supporting evidence and noted that moving money from an account does not necessarily indicate an attempt to avoid a judgment; funds used for active trading could have been reinvested elsewhere or belonged to a fund, employer, or client.

Trading Patterns Do Not Establish Likely Insider Trading

Beyond irreparable harm, Susquehanna failed to demonstrate a likelihood of success on the merits of its Section 20A claim. To prevail, the company would need to prove that someone owing a fiduciary duty used material nonpublic information to trade or tipped that information to others.

Susquehanna submitted trading charts showing defendants buying highly risky, short-dated put options expiring on or shortly after the May 22 announcement, arguing no plausible explanation existed other than insider trading. However, defendant Zhengfei Li offered an alternative explanation. His records showed two equally sized positions, half expiring before May 22 and half afterward. Li told the court the pattern was consistent with repeated speculation based on public market signals, citing unusually heavy put option activity visible through public market information and investor discussions.

Evidence submitted by Li showed a put-to-call ratio of roughly 49 to 1 on May 21, the day he entered positions expiring after the announcement. Another defendant provided similar reasoning and submitted messages showing her reaction when the crackdown became public.

The court concluded that defendants could have noticed unusual market volatility or publicly available posts suggesting negative news was approaching and traded on those signals. Information available publicly does not qualify as nonpublic information under insider trading law. While some defendants’ trading records appeared more suspicious than Li’s, Susquehanna relied on broad arguments across a large group rather than providing detailed individual analysis. The judge noted the scale of the original case—accusing 100 defendants of receiving insider information—even though Susquehanna later stopped seeking an injunction against more than half of them.

Susquehanna had not identified the alleged tipper, the fiduciary duty owed, or the personal benefit received for providing the information. The court found the large number of unconnected investors could support explanations other than insider trading.

Context: China’s Crackdown on Cross-Border Trading

The May 22 regulatory action at the center of the case involved Chinese scrutiny of overseas trading services offered to mainland investors. Previous reporting indicated Chinese securities regulators targeted cross-border brokerage activity involving firms such as Tiger Brokers, Futu, and Longbridge. The action concerned companies providing mainland clients access to overseas markets without regulatory approval.

China had already tightened restrictions on crypto and real-world asset tokenization in February, extending restrictions to offshore entities serving mainland users and maintaining limits on virtual currency-related financial services. Days after the May 22 development, China’s Supreme People’s Court said judicial authorities would study rules for virtual currency disputes and cases involving cross-border financial activity.

Enforcement involving overseas fund movements continued in July, when a Shanghai court sentenced five people over an illegal foreign exchange network that prosecutors said used cryptocurrency to move more than $29.4 million abroad. Authorities said the network helped domestic clients transfer more than 200 million yuan overseas over three years.

Alternative Attachment Request Also Denied

Susquehanna’s failure to establish likely success on the merits also doomed its alternative request for an attachment order under Federal Rule of Civil Procedure 64. In New York, a party seeking attachment must show, among other requirements, that it is probable to succeed on the merits.

Susquehanna relied on the same arguments presented for the preliminary injunction. Subramanian found the company had not demonstrated likely success on either its Section 20A claim or its unjust enrichment claim. The unjust enrichment allegation was based on the same underlying claim of illegal insider trading, and the court found Susquehanna had not clearly shown defendants traded using material information unavailable to the market.

Questions also remained over the extent of Susquehanna’s losses because the market maker acknowledged using hedging strategies. The record did not establish how much of the defendants’ alleged gains, if any, came at the plaintiffs’ expense.

Subramarian stressed that the ruling did not decide whether Susquehanna had adequately pleaded plausible claims for relief, an issue the court had not yet addressed. The higher standard required to freeze funds totaling just under $100 million had not been met. The court denied both the preliminary injunction and the alternative attachment request. An earlier order restricting the funds was set to dissolve at 5 p.m. ET on September 16.