A court on May 22 ordered New York State Attorney General Letitia James to prove her office has the right to sue Bitfinex and Tether for fraud and securities law violations.
On April 24, James sued leading cryptocurrency exchange Bitfinex and stablecoin issuer Tether over a $625 million loan Tether gave Bitfinex after the latter lost $850 million entrusted to its payment processor, Crypto Capital. Bitfinex claimed the funds were seized by governments and will be returned.
New York State Supreme Court Judge Joel Cohen issued a stay on a preliminary injunction ordering the three companies to turn over documents relating to the loss and loan while he determines if New York has any jurisdiction over the foreign companies, which ban U.S. citizens from using their services.
James’ office accused the companies of fraud, conflict of interest, and violation of New York’s Martin Act governing securities last November, when Tether issued Bitfinex a $900 million line of credit from the U.S. dollar reserves backing its USDt stablecoin. The only notice given was a vaguely worded statement on the Tether website saying that the stablecoin was no longer backed 1-to-1 by a reserve of U.S. dollars.
The new language said USDt was backed by “traditional currency and cash equivalents and, from time to time, may include other assets and receivables from loans made by Tether to third parties, which may include affiliated entities.”
Bitfinex and Tether are both owned by iFinex, and the companies share senior executives. A statement on Bitfinex’s website called the order a “victory in the ongoing defence of our businesses against the New York Attorney General’s overreach… [and] false and unsupported claims against us.”
In a May 21 filing, iFinex attorney Stuart Hoegner noted that both iFinex and Bitfinex are incorporated in the British Virgin Islands, and Tether in Hong Kong, and that none have offices in the United States.
“Both Bitfinex and Tether prohibit any United States customers, expressly including customers in the State of New York, from using their platform,” said Hoegner. Only verified Tether customers may redeem USDt for currency, he added.
In a supporting memorandum filed at the same time, Hoegner said, “The Office of the New York Attorney General (“OAG”) initiated this special proceeding ostensibly ‘to protect New York investors.’ But … OAG has not identified, even in a general sense, any ‘victim’ in New York (or, it should be noted, anywhere else).