DOJ Probes Alleged Insider Trading Scheme That Stung Susquehanna

(Bloomberg) -- The Justice Department is looking into Susquehanna International Group's allegations that unknown insider traders made $100 million on options bets placed ahead of a recent Chinese regulatory crackdown on cross-border brokerages, according to people familiar with the matter.

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Susquehanna went public with its claims in a lawsuit filed Monday in Manhattan federal court. The Justice Department's probe is being led by the criminal division in Washington and is in its early stages, said one of the people, who asked not to be identified discussing a confidential matter.

The Securities and Exchange Commission is also examining the trades described in the market-making firm's complaint, Bloomberg reported Wednesday.

A representative for the Justice Department's criminal division didn't immediately respond to a request for comment. The SEC declined to comment.

Pennsylvania-based Susquehanna said in its suit that it lost more than $70 million as counterparty on most of the alleged insider trades. According to the complaint, the traders bought US exchange-traded options in Chinese securities firms that were subsequently targeted in a May 22 crackdown.

Susquehanna sued 100 John Doe defendants, acknowledging it did not know who made the trades, but it said "high risk, high reward" options bets could only be plausibly explained as insider trading. The firm said it would be one of the largest insider-trading schemes in recent memory, outstripping that led by Galleon Management's Raj Rajaratnam, which "yielded only approximately $53 million in profits."

A federal judge later on Monday granted Susquehanna's request for an order freezing accounts at Interactive Brokers Group Inc. and the platforms of Futu Holdings Ltd. and Up Fintech Holdings Ltd. that the defendants allegedly used to make their trades. Susquehanna was also given permission to subpoena the firms for the account-holders' identities.

Futu and Up Fintech's Tiger Brokers were also two of the firms targeted by the Chinese government, which said they were operating unlicensed trading services for mainland residents. Shares in both fell sharply on the May 22 announcement. Futu was hit with a 1.85 billion yuan ($272 million) regulatory penalty, and founder Leaf Li saw his fortune drop by $1.7 billion in a single day on the stock drop.

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A spokesperson for Interactive Brokers said it had been cooperating with Susquehanna, including freezing accounts, and would "cooperate with relevant regulators as we receive inquiries." Up Fintech, Futu and China's securities regulator didn't respond to requests for comment on the case.

In its lawsuit, Susquehanna said the alleged insider traders were likely tipped off by Chinese regulatory staff or workers at Futu or Up. They were able to buy the options cheaply, spending around $12 million to generate a profit of at least $100 million, Susquehanna said.

Susquehanna, which is active in options, stocks, energy, bonds and foreign exchange markets, said in an SEC filing that its equity positions in the first quarter totaled more than $893 billion. The market-making firm has made its co-founder Jeff Yass one of the richest people in the world with a fortune estimated at $93 billion, according to the Bloomberg Billionaires Index.

The Chinese government's announcement that it would punish firms helping mainland Chinese clients illegally invest overseas was released by eight regulators, including the China Securities Regulatory Commission, the central bank and the public security ministry.

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