On April 24, 2019, the New York Attorney General filed a petition in New York state court, alleging that Bitfinex (i.e., iFinex, Inc., BFXNA Inc., and BFXWW Inc.) and Tether (i.e., Tether Holdings Limited, Tether Operations Limited, Tether Limited, and Tether International Limited) hid a loss of more than US $850 million from investors and then used up to US $700 million of U.S. dollar reserves to cover that loss. The petition brought claims for violations of the Martin Act – a New York state law that prohibits (among other things) fraudulent practices “relating to the purchase, exchange, investment advice or sale of securities or commodities” and provides the New York Attorney General “with broad statutory authority to investigate potential violations.”
Bitfinex is one of the world’s largest cryptocurrency exchanges. Tether is a company that issues a “stablecoin” cryptocurrency called “tethers,” which is backed by real world currencies such as U.S. dollars and euros. Since tethers are backed one-to-one by fiat currency, they are thought to be more “stable” and less vulnerable to large swings in value often experienced by other cryptocurrencies.
On May 21, 2019, Bitfinex and Tether moved to dismiss the New York Attorney General’s petition on the grounds that the court lacked personal and subject matter jurisdiction. The court denied the motion on August 19, 2019:
- Personal Jurisdiction: The court held that it had personal jurisdiction because Bitfinex and Tether had “transacted some business in New York” by allowing New York customers to transact on Bitfinex, permitting New York-based traders to use Bitfinex, agreeing to loan tethers to a New York-based virtual currency trading firm, opening accounts with and using New York-based banks, and having a physical presence in New York through an executive who resided in and worked from the state.
- Subject Matter Jurisdiction: The court held that, although there might be some instances in which a Martin Act case might fall outside of the statute’s reach and the court might grant a dismissal, the Martin Act should apply if the issue was a “close call.” The court held that it had subject matter jurisdiction because Bitfinex and Tether had not shown that the New York Attorney General’s investigation was “utterly irrelevant to any proper inquiry” and Bitfinex’s and Tether’s arguments about whether tethers are securities were premature.In addition, on April 24, 2019, the court issued a preliminary injunction restraining Bitfinex and Tether from accessing Tether’s U.S. dollar reserves. The court narrowed that preliminary injunction on May 16, 2019, to restrain Bitfinex and Tether only from accessing Tether’s U.S. dollar reserves outside of the ordinary course of Tether’s business if it would result in Bitfinex having a claim on those dollar reserves. The court subsequently denied Bitfinex’s and Tether’s application to stay the preliminary injunction pending the appeal and instead extended the preliminary injunction until 90 days after the appeal has been decided.
- Bitfinex and Tether appealed the court’s decision, and that appeal is currently pending.