New York v. Bitfinex — “Fundamentally, Respondents misperceive the respective roles of the Attorney General and the Court.”

The New York Attorney General is investigating Bitfinex, Tether and various associated iFinex companies — on the basis, amongst other reasons, that there’s been funny business with the Tether “reserve”.

Tether Inc. issues “tethers” — a cryptocurrency token “stablecoin,” meant to be worth one US dollar. For a long time, Tether maintained that every tether was backed by a dollar held in reserve … then they stopped saying that — and it came out that $850 million of their “reserve” had been seized or stolen in October 2018.

So — since iFinex seemed to have dealings in the state of New York — the NY AG wanted to just ask them a few questions about this … as iFinex’s action seemed to be covered by New York securities law, the Martin Act.

iFinex have bitterly resisted every step of the way. They very much do not want to submit documents requested in discovery. Most recently, iFinex filed a motion asserting at length that their business did not touch New York, and so the entire investigation should be thrown out. And also, that the court had no jurisdiction. And a letter threatening an appeal.

The Hon. Joel M. Cohen of the New York Supreme Court feels otherwise — “Fundamentally, Respondents misperceive the respective roles of the Attorney General and the Court.” iFinex’s motion has been denied. The NY AG’s investigation can continue, and iFinex must submit the requested documents.

iFinex have appealed — but the investigation and discovery request have not been stayed pending appeal. iFinex must cough up the documents, in short order.

Summary of the Court’s response

iFinex maintain that their businesses — Bitfinex, a cryptocurrency exchange, and Tether, a stablecoin “purportedly backed by U.S. dollar reserves” — do not have a sufficient connection to New York to fall under “personal jurisdiction.” And they don’t concern securities, so the Court doesn’t have jurisdiction either.

The New York Attorney General responds that jurisdictional questions are premature during an investigation, per precedent — and that iFinex have considerable New York-linked activity.

The Court says that, contra the NY AG, it does have the power to determine jurisdiction at this stage — and it also has subject matter jurisdiction. As such, iFinex’s motion is denied, and the investigation can proceed.

The story so far

The New York Attorney General’s office had been investigating cryptocurrency exchanges, including the iFinex companies. Through 2018 and early 2019, the NY AG had subpoenaed various documents from iFinex — and the company had not complied with repeated requests.

On 24 April 2019, the NY AG, acting under section 354 of the Martin Act, required a pile of documents concerning Tether and Bitfinex’s business — the legal process of discovery.

The Attorney General also got a preliminary injunction, barring Bitfinex and Tether from certain business activities — specifically, shuffling money around in the background to try to cover up the $850 million hole in the Tether reserve.

iFinex responded. On 16 May, Cohen allowed the investigation to go ahead — though he restricted the NY AG’s preliminary injunction, which he called “amorphous and endless.” On 22 May, he stayed — but did not remove — some of the discovery requirements.

iFinex and the NY AG have since batted case filings back and forth — iFinex wants to stop the investigation completely.

Issues of fact

Are tethers a “security or commodity,” and thus possibly covered by the Martin Act? iFinex says not — “their main function is to facilitate other virtual currency transactions.” The NY AG says she has reason to believe otherwise, and this is a question her investigation hopes to answer.

Is iFinex doing business in New York? They say they aren’t — and they’ve deliberately avoided any link to New York since 2017, specifically so as not to fall under its jurisdiction. The NY AG notes her investigation starts at 2015. And in any case, iFinex have New York customers, loaned tethers to a New York firm, banked in New York and had a physical presence through a New York-resident executive (Phil Potter) through to 2018.

Does New York have personal jurisdiction?

iFinex can legally challenge whether New York has personal jurisdiction under section 354. The order lists a pile of precedents.

Nevertheless, the Court has sufficient jurisdiction under section 354 to facilitate this investigation — and is in fact required to by Section 354, both in wording and precedent.

iFinex is not under general New York personal jurisdiction — it’s not the company’s home location. Personal jurisdiction here only concerns business activities of Bitfinex and Tether that reach into New York.

But not being based in New York does not make iFinex immune to investigation intended to ascertain facts. And the Court has sufficient jurisdiction to let that go forward.

New York will have to show personal jurisdiction, should they proceed with legal action. The Court lists the evidence the NY AG has so far provided — which, “while not conclusive at this point, suggests that Respondents knowingly conducted business in the State.”

Also — “Respondents’ contention that this proceeding should be dismissed because Petitioner failed to properly serve the April 24 Order is meritless.” This correctly translates as “don’t waste my time.”

Does the Court have subject matter jurisdiction?

Yes, comprehensively. “Fundamentally, Respondents misperceive the respective roles of the Attorney General and the Court” — which also correctly translates as “don’t waste my time.”

The Court does not just rubber-stamp section 354 actions — it has judicial review. But iFinex have not shown that the investigation is “utterly irrelevant to any proper inquiry,” that its inapplicability is “free from doubt,” or that the NY AG does not have an “arguable” position.

Furthermore, tethers may well count as a foreign currency under the Martin Act, or an intangible “good, article, or material” — when we’re talking about a new financial instrument like a “stablecoin,” determining precisely what species of creature this is requires a close investigation into the facts.

And in any case, whether tethers are a security or commodity under the Martin Act may be superfluous to any eventual NY AG legal action — their investigation concerns iFinex as a whole, not just Tether. The Court notes those LEO tokens that Bitfinex just issued. (The Court doesn’t categorise LEOs in this order — but LEOs are really obviously securities under the SEC’s Howey test. And have been purchased by US entities.)

Can the NY AG request documents from outside the United States?

Yes it can, so don’t be ridiculous. “Arguments about extraterritorial reach are unavailing where, as here, the statute is being utilized to investigate domestic conduct … Respondents’ cabined view of the Martin Act would frustrate the aims of the statute.”

No stay pending appeal

iFinex can’t further stay discovery just because it would cost money to comply and there might be complex questions of law. Appeals in New York don’t generally stay actions.

What happens now?

The stay on the original 24 April subpoena is lifted. iFinex must supply the documents requested in discovery. The original order said “not later than 30 days after the date of this order” — I’m not sure when iFinex now need to supply them, but it’ll be pretty soon.

The preliminary injunction placed upon iFinex on 16 May — which bars them from moving Tether assets to other iFinex companies, distributing Tether assets as a distribution or dividend, or destroying subpoenaed documents — is extended to 14 October 2019.

iFinex have put in notice of an appeal. I don’t know when this will be heard.

In non-New York news just in, Tether have decided that a Chinese Yuan tether would be a great new coin to issue. I’m sure that will work out fine for them.


brb, busy transmuting from a New York maximalist to a no-New Yorker

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