Court denies Bitfinex’s request to scrap $850M fraud investigation
A New York court today denied a request from crypto exchange
Bitfinex to scupper an investigation by the state’s Attorney General, who
alleges that Bitfinex used its sister company, the stablecoin giant Tether, to
hide a near-$1 billion hole in its finances.
Despite Bitfinex’s protestations, the court said that it
does have jurisdiction, as does the NYAG.
Tether had originally claimed that its US-dollar pegged
stablecoin was backed by US dollar reserves—for every USDT token, it had one US
dollar in its bank account.
But last April, Attorney General Letitia James’ office
argued that USDT was not one-to-one backed by US dollar reserves. Tether later
conceded that its reserves were only 74% backed by US dollars.
Why weren’t they 100% backed? The NYAG alleges that, when
the dubious “shadow bank” used by the companies, Crypto Capital, was frozen and
its directors arrested, Bitfinex issued Tether loans to replace that money. The
loans, it alleged, were little more than IOUs.
Bitfinex, argued the NYAG, had used Tether’s cash reserves
as its “corporate slush fund,” and that the reserves are “being used to hide
Bitfinex’s massive, undisclosed losses and inability to handle customer
withdrawals.”
Why did the court reject Bitfinex’s motion to dismiss?
Bitfinex has denied these allegations and asked to scrap the
investigation. A spokesperson for Bitfinex could not be reached for comment.
But a New York state appeals court today rejected Bitfinex’s
motion to dismiss the case for several reasons.
First, the court dismissed Bitfinex’s argument that Tethers
aren’t securities, so the court doesn’t have “jurisdiction over them.” The
court dismissed this; it does have the authority to rule on Tether, it argued.
The court said that Tether constitutes a security under the Martin Act, the act
under which the court has jurisdiction.
Second, the court dismissed Bitfinex’s argument that the
NYAG’s investigation wasn’t related to New York state. The court disagreed,
citing a case concerning Deutsche Bank in which "proof of one transaction
in New York is sufficient to invoke jurisdiction, even though the defendant
never enters New York.” Several New Yorkers have used Tether, so its argument
doesn’t hold up, said the court.
Accordingly, the court denied Bitfinex’s motion to dismiss.
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