The saga continues — NYAG v. Bitfinex/Tether
Quick Summary of the recent NYAG Decision and Order:
IN THE MATTER OF THE INQUIRY BY LETITIA JAMES, ATTORNEY GENERAL OF THE STATE OF NEW YORK, v. IFINEX INC., BFXNA INC., BFXWW INC., TETHER HOLDINGS LIMITED, TETHER OPERATIONS LIMITED, TETHER LIMITED, TETHER INTERNATIONAL LIMITED (NYAG v. Bitfinex/Tether for short).
TL;DR: The Court modified the April 24 preliminary injunction and now Bitfinex is allowed to continue using Tether’s reserves that were already loaned to Bitfinex to maintain their ordinary course of business, such as paying employees and consultants. Bitfinex may not withdraw any further funds from the tether reserve, and must comply with all document requests pursuant to the NYAG investigation. This modified preliminary injunction went into effect on May 16, 2019 and will last for 90 days.
On May 16, the NYAG modified the original injunction against Bitfinex/Tether.
On April 24, 2019, the Office of the Supreme Court of the State of New York — Commercial Division granted an Order submitted by the Office of the Attorney General (OAG) requiring Bitfinex/Tether to provide information under the Martin Act. The Court granted a preliminary injunction restricting Bitfinex/Tether from further violating the Martin Act including engaging in “fraudulent, deceptive, or illegal acts,” and “employing any device, scheme, or artifice to defraud or obtain money or property by means of false pretense, representation, or promise.”
Bitfinex/Tether objected that the OAG gave no warning, despite being in close communication with them, and pleaded to the Court to modify the Order. There was a hearing on May 6, 2019 where the Court found that Bitfinex/Tether needed to produce some more evidence but agreed the preliminary injunction should also be modified.
The primary concern raised by the Court is that on Feb 21, 2019, the OAG learned that Bitfinex was contemplating a transaction that would allow Bitfinex to draw upon Tether’s cash reserves on an as-needed basis. The OAG had serious concerns about the viability of Bitfinex, and whether any money they “borrowed” could ever be repaid to the Tether reserves. Bitfinex/Tether disregarded these concerns and established paperwork for a $900 million line of credit with Tether’s reserves, and notified the OAG two days later, on March 29, 2019. It turned out, $625 million had already been borrowed back in November 2018, so this line of credit paperwork appears to be an attempt to get their ducks in a row after the fact. The loan left Tether with $150 million in its reserves, and the NYAG suspected this could be dissipated at any time. Bitfinex/Tether adamantly maintained it was a proper, arms-length transaction.
This resulted in the April 24 Court Ordered document production and injunction forbidding Bitfinex from accessing the Tether reserves for any reason whatsoever.
It appears the Court has received a lot of the documents it was requesting from Bitfinex/Tether, which was a primary purpose of placing the injunction, so on May 16, 2019, the Court modified the injunction. The Court noted that its injunction powers through New York Business Law and The Martin Act are limited beyond the scope of forcing document production. “[the applicable law] does not provide a roving mandate to regulate commercial activity by subjects or targets of a Martin Act investigation.”
The Court found that the NYAG made a sufficient showing to meet the very high standards required for a preliminary injunction that would prevent Bitfinex/Tether from continuing to let dollars flow out of Tether’s reserves while the investigation continues. The Court revised the preliminary injunction to strike a balance between protecting the public and protecting Bitfinex/Tether from undue business restrictions. The initial temporary injunction was found to be vague, overbroad and not preliminary because it had no end point. It prevented Bitfinex/Tehter from “further violations of the law or committing fraud.”
The May 16th Order:
The Court reworded the preliminary injunction so not to restrain Bitfinex/Tether from ordinary business activities. Now Bitfinex/Tether and their agents are prohibited from:
Any use of Tether’s reserves by Bitfinex
Making any distributions or dividends to any of the high-level associates of Bitfinex/Tether using funds that were already borrowed from Tether’s reserves — this does not include payments in the ordinary course of business, such as payroll, payments to vendors, consultants, contractors, etc.
Directly or indirectly tampering with or destroying any evidence (including a long list of documents/communications) or other information requested by the NYAG’s Nov 27, 2018 or Feb 26, 2018 (this may be a typo, I think the Court meant 2019…?) document requests.
This preliminary injunction will last 90 days from May 16, 2019.
Meanwhile, Bitfinex appears to have raised $1 billion privately in ten days according to its CTO, Paolo Ardoino, on twitter, “.@bitfinex is able to raise 1b USDt in 10 days, in a private sale. Private companies, giants in our industry and outside, made investments for > 100m each. A legion of inside and outside users made investments for > 1m each.” https://twitter.com/paoloardoino/status/1127839301218254851?s=20
For more information, Amy Castor has been doing a phenomenal job covering this story: https://amycastor.com/. Amy and I did a podcast on the subject as well: https://soundcloud.com/sashahodler/hodlcast-ep-81-a-deep-dive-into-bitfinex-with-amy-castor