Susquehanna loses bid to freeze $100m in alleged insider trading case

A New York federal judge has denied Susquehanna's bid to freeze nearly $100 million tied to dozens of traders accused of profiting from alleged insider information before China announced a crackdown on cross border trading platforms.

• Susquehanna's request to freeze nearly $100 million linked to alleged insider trading has been denied by a New York federal judge.
• The court found insufficient evidence that defendants were likely to hide or dissipate the funds before a potential judgment.
• Susquehanna failed to show likely success on claims that traders used nonpublic information before China announced its May 22 crackdown.
• The judge denied both the preliminary injunction and an alternative request to attach the defendants' assets.

According to a Sept. 14 opinion and order from the U.S. District Court for the Southern District of New York, Judge Arun Subramanian found that Susquehanna Securities and Susquehanna Investment Group had not shown they were likely to suffer irreparable harm without a preliminary injunction.

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 before a May 22 announcement concerning the Chinese government's crackdown on cross border trading platforms. Susquehanna alleged that the defendants traded using material nonpublic information before the news caused a sharp decline in certain securities.

The market maker initially targeted 100 defendants but narrowed its request for a preliminary injunction to 40. It asked the court to prevent them from transferring, encumbering, removing or otherwise disposing of proceeds held at third party brokerage firms that Susquehanna claimed came from insider trading.

As an alternative, the company sought an attachment order that would allow assets to be seized to secure a potential judgment.

Susquehanna failed to show an imminent risk to the funds

Subramanian found that Susquehanna had not produced enough evidence to establish that the defendants were likely to dissipate or conceal their assets before a judgment could be enforced.

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

The court separately considered defendants living in the United States, foreign defendants who had appeared in the case and foreign defendants who had not appeared.

For domestic defendants, Susquehanna pointed to their failure to appear as part of its argument that the funds could be dissipated. The court found no evidence showing that their absence meant they intended to frustrate enforcement of a future judgment, noting that some apparently had not yet been formally served.

Susquehanna raised a similar concern over defendants living outside the United States, arguing that their assets could be moved beyond the jurisdiction of U.S. courts. Subramanian found that the possible difficulty of enforcing a judgment overseas was not enough by itself to establish irreparable harm.

The company did not identify a pattern of defendants hiding funds, making fraudulent transfers or engaging in evasive conduct, according to the order. Some foreign defendants who had appeared in the case submitted evidence indicating that they had enough funds to satisfy a potential judgment.

Susquehanna came closest to establishing a potential risk when it said in a reply filing that one defendant, identified as John Doe 3, appeared to have removed more than $10 million from a relevant account before a freeze took effect.

The court found that the claim lacked supporting evidence and said moving money from an account did not necessarily show an attempt to avoid a judgment. Funds used for active trading could have been reinvested elsewhere or could have belonged to a fund, employer or client.

Trading patterns did not establish likely insider trading

Susquehanna faced another problem because the court found that it had not demonstrated a likelihood of success on the merits of its claims.

To prevail on its Section 20A claim, the company would need to establish that someone owing a fiduciary duty of trust and confidence used material nonpublic information to profit from trading or tipped the confidential information to others.

Susquehanna submitted trading charts that it said showed defendants buying highly risky, short dated put options expiring on or shortly after the May 22 announcement. The company argued that there was no plausible explanation for the pattern other than trading based on material nonpublic information.

One defendant, Zhengfei Li, offered a different explanation. His trading records showed two equally sized positions, with half expiring before May 22 and the remainder afterward.

Li said the pattern was consistent with repeated speculation based on market signals instead of precise knowledge of an announcement. He told the court that unusually heavy put option activity visible through public market information and investor discussions led him to buy his own put options.

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 said she bought put options for similar reasons and submitted messages showing her reaction when the Chinese crackdown became public.

The court said defendants could have noticed unusual market volatility or publicly available posts suggesting that negative news was approaching and traded on those signals. Information available publicly would not qualify as nonpublic information under the insider trading claim.

Subramanian noted that some defendants' trading records appeared more suspicious than Li's. Susquehanna, however, brought the defendants together in one lawsuit and relied on broad arguments instead of providing detailed individual treatment of each trader.

The judge pointed to the scale of the original case, which accused 100 defendants of receiving insider information even though Susquehanna later stopped seeking a preliminary injunction against more than half of them.

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

China crackdown triggered the trading dispute

The May 22 regulatory action at the center of the case involved Chinese scrutiny of overseas trading services offered to mainland investors.

crypto.news previously reported that Chinese securities regulators had targeted cross border brokerage activity involving firms including 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.

Court rejects alternative request to attach assets

Susquehanna's failure to establish likely success on the merits affected its alternative request for an attachment order.

Federal Rule of Civil Procedure 64 allows courts to seize property to secure a potential judgment when the remedy is available under the law of the state where the court sits. 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 it presented in support of the preliminary injunction. Subramanian found that 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 that defendants had engaged in illegal insider trading. The court found that Susquehanna had not clearly shown that the defendants traded using material information unavailable to the market.

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

Subramanian 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 Sept. 16.