Paging Dr. Evil (via Wiki commons).
Tether

Tether, Bitfinex sued for $1.4 trillion (yes, with a ‘t’)

The staggering sum is for allegedly rigging the Bitcoin market in a way that would make Enron blush

The same lawyers who sued Craig Wright for $5 billion are going after Tether and Bitfinex, demanding a staggering $1.4 trillion.

That’s about double the amount America pays for the entire U.S. military and its operations in Afghanistan and Iraq. 

Tether Watch

The law firm of Roche Freedman filed suit in U.S. District Court of the Southern District of New York on October 7. It was based on 2018 allegations that stablecoin issuer Tether and its sister company, cryptocurrency exchange Bitfinex, manipulated the markets to drive up the price of Bitcoin.

“Part-fraud, part-pump-and-dump, and part-money laundering, the scheme was primarily accomplished through two enterprises—Bitfinex and Tether,” the suit opened. 

The companies “commingled their corporate identities and customer funds while concealing their extensive cooperation in a way that enabled them to manipulate the cryptocurrency market with unprecedented effectiveness,” Roche Freedman added.

The Tulip Bubble had nothing on Bitcoin (Bloomberg chart via Roche Freedman lawsuit).

The Wright Stuff

If the name Roche Freedman sounds familiar, it is. The firm got a taste of the vast sums involved in the cryptocurrency industry when they sued nChain CEO Craig Wright, who claims to be Bitcoin creator Satoshi Nakamoto. That suit, on behalf of the brother of Wright’s late partner David Kleiman, sought half of a cache of 1.1 million Bitcoin. 

Kyle Roche and Velvel (Devin) Freedman won the first round, and Wright is appealing.

[Editor’s note: Roche Freedman subpoenaed Modern Consensus contributor Brendan J. Sullivan because of his interviews with Wright.]

Mr. Bigglesworth (via Wiki commons).
Mr. Bigglesworth (via Wiki commons).

Their latest suit is a class action on behalf of everyone who owned cryptocurrency from October 6, 2014—the day Tether launched—until now. Good luck herding that nuisance of cats. (Yes, “nusiance”—like a “litter” of puppies or a “murder” of crows.)

The sum of $1.4 trillion comes from tripling the actual damage the lawyers say Bitcoin and other cryptocurrency holders suffered when the bubble burst: $450 billion. Not that they actually expect to get it. 

Notably, the lawsuit claims that Tether doesn’t even have enough money to back its USDT stablecoin. 

Instead, as we reported on October 6, both Tether and Bitfinex preemptively denied the allegations and called the action a “meritless and mercenary lawsuit based on a bogus study.”

All about the Benjamins

The study referred to, “Is Bitcoin Really Un-Tethered?” was released on June 13, 2018, by a pair of finance professors. It is at the heart of the lawsuit by Roche and Freedman.

In the 65-page paper, University of Texas at Austin professor John Griffin and Ohio State University instructor Amin Shams made two claims, backed up by a lot of regression statistical analysis.

One is that Tether never had a reserve of dollars backing its USDT stablecoin one-to-one.

Instead, the suit alleged, “Bitfinex and Tether manipulated a market that, by design, is supposed to be decentralized.”

It continued, “[a]t the heart of this scheme was Tether’s claim ‘that the number of [USDT] tokens in circulation will always equate to the dollars in its bank account.”

It added, “[t]his claim was a lie.”

The proof Tether has given to show it actually has the U.S. dollars to back its USDT stablecoin (via Roche Freedman lawsuit).

The one-to-one backing allowed Tether and Bitfinex to show the market a rapidly growing demand for cryptocurrencies, pumping up prices, the lawsuit claimed.

Because of this, “Bitfinex and Tether had the power to, and did, manipulate the market on an unprecedented scale to profit from boom-and-bust cycles they created.”

High and low

Griffin and Shams’ second claim was that when Bitcoin prices fell below psychologically important levels—increments of $500—Tether minted USDT coins and pushed them to sister company Bitfinex. These were used to buy bitcoin, causing prices to rise.

The 488% rise in Bitcoin prices between Q2 2017 and Q2 2018, “cannot be explained by investor demand,” they said. An honest market would have risen 245%, they added.

Instead, they found “that purchases [of Bitcoin] with Tether are timed following market downturns and result in sizable increases in Bitcoin prices.”

Of course, if this is true, you have to ask: If Bitfinex and Tether caused so much of Bitcoin’s price rise in the good times, how much damage did they actually cause when Bitcoin crashed?

Is this the beginning of RICO?

The Roche Freedman lawsuit also relies on the ongoing lawsuit filed by New York Attorney General Letitia James on April 25, 2019. That civil suit alleges fraud and securities violations by the two firms related to a loan of up to $700 million by Tether to Bitfinex. The loan came after Bitfinex allegedly lost $850 million to a con man while trying to bring fiat currency into the U.S. in order to American customers’ withdraws.

The Roche Freedman suit also said Tether, Bitfinex, and their parent company iFinex, violated seven different laws, the most serious of them the Racketeer Influenced and Corrupt Organizations (RICO) Act. That criminal law was originally designed to prosecute the mafia.

Roche and Freedman alleged “money laundering, bank fraud, monetary transactions derived from specified unlawful activities, wire fraud, and the operation of an unlicensed money transmitting business” in the RICO allegations.

There were also three violations of the Commodities Exchange Act, including market manipulation. That was followed by violation of the Sherman Anti-Trust Act, and fraud.

Finally, the attorneys accused the three companies of violating a state law, the New York Deceptive Trade Practices Act.

Show us the money

The suit made three demands. The first was that Tether stop issuing unbacked USDT coins. 

The second was that Tether and Bitfinex stop manipulating the Bitcoin and broader cryptocurrency market.

The third, of course, was for damages—that $450 billion lost in the 2018 cryptocurrency market crash, trebled to $1.4 billion because of fraud. 

And, of course, that includes attorney’s fees.

Leo Jakobson, Modern Consensus senior editor, is a New York-based journalist who has traveled the world writing about meeting and incentive travel, as well as the consumer and employee loyalty business. He also covered the East Coast side of the Internet boom and bust, small businesses, and New York City crime, nightlife, and politics. Disclosure: Jakobson owns no cryptocurrencies.

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