New York State Supreme Court building in Lower Manhattan showing the words "The True Administration of Justice" on its facade (via Shutterstock).
New York State Supreme Court building in Lower Manhattan showing the words "The True Administration of Justice" on its facade (via Shutterstock).
Tether

NY Attorney General restarts Bitfinex, Tether investigation

A judge ruled that Letita James’ office had jurisdiction to investigate the stablecoin-issuer’s bailout of the embattled cryptocurrency exchange

By  / August 20, 2019 /

News from New York Attorney General Letita James lawsuit against Bitfinex and Tether might finally be getting juicier. In an August 19 ruling, Judge Joel Cohen of the New York State Supreme Court shot down attempts by cryptocurrency exchange Bitfinex and its sister company, stablecoin issuer Tether, to shut down the civil action. 

Tether Watch

His ruling, that the Attorney General had jurisdiction to sue the two companies, brought an end to a three-month lull in the case. That began on May 22, when Bitfinex and Tether argued that because they did not do business in New York, James’ office had no standing to file the case. While hearing that argument, the judge effectively halted the Attorney General’s investigation. While the jurisdiction question was waiting to be decided, the companies did not have to turn over any information about the main charges—that Tether and Bitfinex committed fraud and violated New York’s Martin Act governing securities.

At the same time, the judge’s order preventing Tether from loaning Bitfinex any more money remained in place.

Now, Bitfinex, Tether and their owner, iFinex, will have to start giving James’ office internal documents about the $900 million line of credit and up to $700 million loan Tether secretly gave Bitfinex. The exchange was threatened with insolvency after it lost $850 million to an alleged con man in 2018. James’ lawsuit forced the disclosure of the loan, and the fact that tether (USDt) was no longer backed one-to-one with a reserve of U.S. dollars. 

iFinex’s CEO has said the $850 million had actually been seized by governments including the United States, United Kingdom, Portugal, and Poland, and was safe.

On April 30, the U.S. Attorney’s office indicted Arizona businessman Reginald Fowler on charges of bank fraud after he allegedly siphoned hundreds of millions out of an account Bitfinex had with payment processor Crypto Capital. That payment processor actually lost the $850 million, according to the lawsuit. The U.S. was able to seize only $50 million of that.

Bitfinex in May dug itself out of any longer-term financial trouble after it raised $1 billion in an exchange token offering. However, more bad news came in a May 16 ruling, in which Judge Cohen noted that if James office had jurisdiction, the Martin Act violation charges had “a likelihood of success on the merits.”

Another motion on May 21 halted the requirement that Bitfinex and Tether keep turning documents over to James for her investigation. This limited discovery to whether the companies did business in New York, which would give the Attorney General jurisdiction. It also revealed that Tether had invested part of its dollar reserve in bitcoin.

With the investigation about to resume, Bitfinex and Tether could have to dig deeper into their pockets. Earlier this month, the companies told the court that it had already spent $500,000 defending itself, and predicted a full investigation could cost it $5 million in legal fees. 

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Leo Jakobson, Modern Consensus editor-in-chief, is a New York-based journalist who has traveled the world writing about incentive travel. He has also covered consumer and employee engagement, small business, the East Coast side of the Internet boom and bust, and New York City crime, nightlife, and politics. Disclosure: Jakobson has put some 401k money into Grayscale Bitcoin Trust.