New York State Attorney General Letitia James’s office called shenanigans yesterday on Bitfinex and Tether’s argument that it could spend $5 million defending itself from accusations of fraud.
The attorney general sued the companies on April 25, alleging fraud and state securities law violations when Tether secretly loaned its sister company up to $700 million after it was robbed of $850 million.
The accusations by James’ office were in response to a complaint made on Tuesday by lawyers for iFinex, which owns cryptocurrency exchange Bitfinex and stable coin producer Tether. They say the companies have already spent more than $500,000 on 60 lawyers to produce documents for James’ office.
The merits of the case are not at issue. Lawyers for iFinex are trying to get New York State Supreme Court Judge Joel Cohen to continue a stay order preventing prosecutors from demanding more evidence while the court decides if it even has jurisdiction to hear the case.
Bitfinex and Tether both claim that they don’t do business in New York and haven’t since January 30, 2017. The attorney general’s office says it has plenty of New York-based customers, including Mike Novogratz’s Galaxy Digital merchant bank.
Earlier this week, Bitfinex and Tether’s lawyers complained that they have spent well over a half million dollars producing just the documents seeking information about the existence of those alleged New York clients.
“This is not a document production that simply entails pressing a button and collecting emails from a centralized server,” attorneys from Steptoe & Johnson and Morgan, Lewis & Bockius told the court in a filing on Tuesday. “On the contrary. The companies and their personnel use more than 10 different communications platforms—several of which are encrypted and pose substantial collection and review challenges.”
Describing the process as the “largest and most complex document collection and review effort in which [they] have ever participated,” the attorneys’ noted that it involved “over 60 lawyers [their emphasis].”
Making the $5 million dollar claim, the lawyers added that producing the rest of the documents “could be orders of magnitude higher,” while maintaining the stay would have a “minimal” impact on James’ case.
The attorney general’s office was unmoved by that heartfelt plea, noting that case law says that “[m]ere litigation expense, even substantial and unrecoupable cost, does not constitute irreparable injury.”
Nor, they added, should finding those documents cost that much.
“Respondents’ claim of irreparable harm is especially hollow, given that they would likely have to produce some, if not all, of the requested documents,” even if Judge Cohen maintains the stay order.
What they are seeking, the attorney general’s office said, is “information that any responsible trading platform or venue of exchange should have at its fingertips.”
This includes information about the issuance and redemption of tether (USDt) stablecoins, client accounts, tax filings, and “know your customer” (KYC) data on clients who have made fiat currency withdrawals.
They also want data on the $900 million line of credit Tether gave Bitfinex. Those funds were drawn from the supply of U.S. dollars backing its tether cryptocurrency. Tether made highly publicized claims for a long time that tether was backed one-to-one with dollars. After the loan drained Tether’s coffers to that point where it was only 74% backed by fiat currency, the company’s only public notice was vaguely worded change to the language on its website.
Bitfinex subsequently raised $1 billion from private investors with an initial exchange offering (IEO).
The exchange told the court it paid back $100 million of that loan in July, as the lawyers for it and Tether noted in their filing. That came as part of its argument that no USDt customers were harmed by the loan.
Updated August 20 to reflect amount loaned by Tether to Bitfinex.
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February 3, 2018
