2019 in The Matter of The I V in The Matter of The I MEMORANDUM of LAW I 56

FILED: NEW YORK COUNTY CLERK 05/03/2019 11:55 PM INDEX NO.
450545/2019
NYSCEF DOC. NO. 56 RECEIVED NYSCEF: 05/03/2019
SUPREME COURT OF THE STATE OF NEW YORK

COUNTY OF NEW YORK
----------- ---- ------ - ----------- -- -- x
In the Matter of the Inquiry by LETITIA JAMES, :
Attorney General of the State of New York,
Petitioner,
: Index No.: 450545/2019

Pursuant to article 23-A of the New York General
Business Law in regard to the acts and practices of

:
:
iFINEX INC., BFXNA INC., BFXWW INC.,
TETHER HOLDINGS LIMITED, TETHER .
OPERATIONS LIMITED, TETHER LIMITED,
TETHER INTERNATIONAL LIMITED
:
Respondents,
:
in promoting the issuance, distribution, exchange, :
advertisement, negotiation, purchase, investment .
advice or sale of securities or commodities in or from .

New York State.
------ ----------------------- -------- x
RESPONDENTS'
MEMORANDUM OF LAW IN OPPOSITION TO MOTION TO
VACATE OR MODIFY THE APRIL 24, 2019 ORDER PURSUANT TO GENERAL
BUSINESS LAW § 354
LETITIA JAMES
Attorney General of the State of New York

28 Liberty Street
New York, New York 10005
Petitioner
1 of 29
FILED: NEW YORK COUNTY CLERK 05/03/2019 11:55 PM INDEX NO. 450545/2019
TABLE OF CONTENTS
TABLE OF CONTENTS................................................................................................................. i
TABLE OF AUTHORITIES .........................................................................................................iii
PRELIMINARY STATEMENT .................................................................................................... 1
BACKGROUND ............................................................................................................................ 3
A. The OAG's Investigation of Bitfinex and Tether...................................................... 3
B. The OAG Determined that Bitfmex and Tether Committed Fraudulent Acts;
Applied for Relief Pursuant to Section 354 of the Martin Act.................................. 4
C. Justice James Grants the OAG's Order Pursuant to Section 354.............................. 7
Respondents'
D. Motion to Vacate or Modify Raises Additional Questions
Relevant to the OAG's Investigation........................................................................ 8
E. Recent Events Underscore the Need to Maintain the Status Quo............................. 9
ARGUMENT................................................................................................................................ 10
Expedient"
A. Section 354 Authorizes "Proper and Injunctions................................. 11
1. The Text of Section 354 Empowers the Court to Issue an Injunction or
Stay that is "Proper and Expedient"................................................................ 11
2. Decades of Case Law Support the Plain Reading of the Text of

Section 354...................................................................................................... 12
3. To Apply Article 63 of the CPLR Would Undermine the Statutory

Framework Set Forth By the Legislature Authorizing Early-Stage Injunctive
Relief............................................................................................................... 15
States'
4. The Provisions of Section 354 Are Consistent With Other Fraud
Enforcement Authority ................................................................................... 17
B. The Injunction Set Forth in the 354 Order was "Proper and Expedient"................ 17
1. The OAG Has Reasonable Cause to Believe that Bitfinex and Tether
Violated the Martin Act................................................................................... 17
2 of 29
2. The Injunction Properly Prevents Bitfinex from Further Dissipating

Tether's Cash Reserves While the OAG's Investigation Proceeds................. 18
C. The Injunction Granted by Justice James Would be Appropriate Under

Article 63 of the CPLR............................................................................................ 19
1. The OAG Has Shown that it Would Succeed in a Martin Act Claim Against
Respondents.................................................................................................... 20
2. Potential Dissipation of Assets is Irreparable Harm........................................ 21
3. Equity, the Cornerstone of the Martin Act, Supports Maintenance of the

Status Quo........................................................................................................ 21
CONCLUSION............................................................................................................................. 22
..
11
3 of 29
TABLE OF AUTHORITIES
Page(s)
CASES
Abrams v. Long Beach Oceanfront Assoc. L.P.,

136 Misc.2d 137 (Sup. Ct. N.Y. Cty. 1987)............................................................................16
Assured Guar. (UK) Ltd. v J.P. Morgan Inv. Mgt. Inc.,

18 N.Y.3d 341 (2011)..............................................................................................................1O
Bradford Audio Corp. v. Pious,

392 F.2d 67 (2d Cir. 1968).................................................................................................12, 15
City of New York v. Smart Apts. LLC,

39 Misc. 3d 221 (Sup. Ct. N.Y. Cty. 2013).............................................................................22
CPC Int'l v. McKesson Corp.,

70 N.Y.2d 268 (1987)........................................................................................................10, 19
First Energy Leasing Corp. v. Attorney General,

68 N.Y.26 59 (1986)..........................................................................................................14, 15
In re Attorney-General (Am. Research Council, Inc.),

10 N.Y.2d 108 (1961)..............................................................................................................16
In re MacNamara,
128 Misc. 84 (Sup. Ct. N.Y. Cty. 1926)............................................................................15, 17
Kralik v. 239 E. 79th St. Owners Corp.,

5 N.Y.3d 54 (2005)..................................................................................................................1O
Matter of Cenvill Communities, Inc.,

82 Misc.2d 418 (Spec. Term, N.Y. Cty. 1975)..................................................................13, 15
Matter of Edelstein, et al.,

Index No. 450416/2019 (April 9,2019)..................................................................................13
Matter of Laurence G. Allen, ACP Investment Group, et al.

Index No. 452346/2018 (Dec. 20, 2018).................................................................................13
Matter of Spitzer v. Merrill Lynch, et al.,

Index No. 401522/200216 (April 8, 2002)...........................................................13
New York v. First Investors Corp.,

156 Misc. 2d 209 (Sup. Ct. N.Y. Cty. 1992).....................................................................19, 21
iii
4 of 29
People v. Barclays Cap. Inc.

1 N.Y.S.3d 910 (Sup. Ct. N.Y. Cty 2015).........................................................................10, 18
People v. Federated Radio Corp.,

244 N.Y. 33 (1926)..................................................................................................................1O
People v. George Henriques & Co.,

267 N.Y. 398 (1935)................................................................................................................12
People v. Lexington Sixty-First Assoc.,

38 N.Y.2d 588 (1976)..............................................................................................................11
State v. Rachmani Corp.,

71 N.Y.2d 718 (1988)..............................................................................................................11
Salitra v. Lefkowitz,
98 Misc 2d 343 (Sup. Ct. N.Y. Cnty 1979).............................................................................20
Schneiderman v. 15 Broad Street,

2014 N.Y. Misc. LEXIS 2007......................................................................................... passim
Schneiderman v. Eichner,
Sup. Ct. N.Y. Cty, May 26, 2016..................................................................................... passim
State v. Fine,
72 N.Y.2d 967 (1988)..............................................................................................................14
STATE STATUTES
CPLR
Article 63 ......................................................................................................................... passim
General Business Law
§ 352.....................................................................................................................................1, 20
§ 353................................................................................................................................. passim
§ 354................................................................................................................................. passim
§ 357................................................................................................................................. passim
5 of 29
Petitioner Letitia James, Attorney General of the State of New York, respectfully submits
Respondents'
this opposition to Motion to Vacate or Modify the April 24, 2019 Ex Parte Order,
and for an Immediate Stay of the Order, dated April 30, 2019 (hereinafter, "Motion to Vacate"),
which sought to vacate or modify the Order Pursuant to General Business Law § 354 by the
Honorable Debra A. James, dated April 24, 2019, directing the production of documents and
information, and ordering certain preliminary injunctive relief (hereinafter, "354 Order").
PRELIMINARY STATEMENT
For almost one hundred years, the Office of the Attorney General ("OAG") has been
empowered by General Business Law § 352 et seq., commonly known as the Martin Act, to
conduct investigations of suspected fraud in connection with the purchase, sale, or exchange of
securities and commodities. While the text of the Act has changed over time, section 354 of the
injunction,"
Act, entitled "Examination of witnesses and preliminary is original, adopted with the
law's passage in 1921. Relevant to this matter is the language of section 354 empowering the
court to issue an injunction: "The order shall be granted by the justice of the supreme court to
whom the application has been made with such preliminary injunction or stay as may appear to
expedient."
such justice to be proper and
Courts that have reviewed the matter since the inception of the Act have held consistently
that the text of section 354 means just what it says: the standard which a justice must use in
expedient."
evaluating the OAG's application for an injunction is that of "proper and That
standard is different from that applicable to an application for a temporary restraining order or
preliminary injunction under the article 63 of the Civil Practice Law and Rules. But that is for a
good reason. The Martin Act is an equitable and remedial statute, empowering the OAG to act
schemes"
to protect the public against whatever "visionary might be discovered and, hopefully,
6 of 29
stopped. The standard for an injunction under section 354 is, accordingly, equitable and
adaptive, committing to the discretion of the justice to whom an application is made the ability to
expedient"
enjoin conduct in the manner that the justice finds "proper and under the
circumstances presented.
In this matter, the OAG and the Court have used the authority granted by the Legislature
to craft a narrow injunction to preserve the status quo and prevent Respondents from further
dissipating the cash reserves that supposedly back the tether virtual currency, pending
completion of the OAG's investigation. Importantly, the 354 Order does nothing to limit
Respondents'
ability to operate their businesses in the normal course, as they have continued to
do since the injunction.
In their Motion to Vacate, Respondents admit quite that the Martin Act as written, and
the case law interpreting it, does not support their position. Instead, Respondents argue that this
Court should simply make new law, and hold without precedent that the preliminary injunction
standard in the CPLR govem the Court's authority to grant relief under section 354. The Court
should decline to do so. Rather, the Court should rule as every other court that has considered
the question has, and hold that upon application for ex parte relief under section 354, the
reviewing justice shall grant such injunction or stay "as may appear to such justice to be proper
expedient."
and On that, or any other standard, the Court should decline to disturb Justice
James'
354 Order prohibiting further transfers from the Tether reserves to Bitfinex, until such
time as the OAG's investigation is complete.
7 of 29
BACKGROUND
A. The OAG's Investigation of Bitfinex and Tether
The full background of the OAG's investgiation of Bitfinex and Tether is set forth in
detail in the Petition/Affirmation of Brian M. Whitehurst, submitted in support of the OAG's
law.'
application for the 354 Order, and the accompanying memorandum of A copy of the
Whitehurst Affirmation and accompanying Exhibits is attached hereto as Exhibit A. A copy of
the Memorandum of Law is attached hereto as Exhibit B. Relevant to this opposition, in 2018
the OAG commenced an invesgtiation into Bitfinex, which operates a virtual currency trading
platform on which several dozen virtual currency securities and commodities (like bitcoin) are
exchanged. Tether is the issuer of a virtual currency also called tether, which is traded on virtual
"USDT."
currency exchange, including exchanges in New York, under the ticket symbol (Aff. ¶¶
21-28.)2
Unlike most virtual currencies, for which the market price fluctuates, often wildly,
"stablecoin,"
tether is a so-called a term which refers to a virtual currency that is always
supposed to have the same real-dollar value - in the case of one U.S. dollar per tether.
tethers,
(Id. ¶ 28.) Bitfinex and Tether are operated by the same small group of executives and
employees, and share common ownership.
Tether has long represented that for every outstanding tether issued and trading in the
market, the company holds one U.S. dollar in reserve. (Id. ¶ 30.). For example, for several years
Tether represented to the market that "Every tether is always backed 1-to-1, by traditional
USD."
currency held in our reserves. So I USDT is always equivalent to 1 (Whitehurst Aff. ¶
"Petition,"
Docket No. filing, the Affirmation
l. Upon was re-styled by the Ex Parte Office as a and
appears as such on the docket. For ease of reference, and continuity with the OAG's prior filings, references to
_"
"Aff. ¶ will refer to that document
2 All in the Petition

definitions are hereby incorporated.
8 of 29
31, Ex. B.) In late February 2019, Tether changed a disclosure on its website to state that "Every
tether is always 100% backed by our reserves, which include traditional currency and cash
equivalents and, from time to time, may include other assets and receivables from loans made by
Tether to third parties, which may include affiliated entities (collectively, 'reserves'). Every
USD."
tether is also 1-to-1 pegged to the dollar, so 1 USDT is always valued by Tether at 1 (Id.
¶ 32, Ex. C.)
The OAG's investigation focused on, among other things, the manner and timing of
Respondents'
issuances of tether, the nature of the relationship between Bitfinex and Tether,
representations to investors regarding the cash reserves backing tethers, the facts and
circumstances of Bitfinex's undisclosed transfer of Tether's cash reserves in 2018, Bitfinex's
ability to process client withdrawal requests (amid its self-admitted liquidity problems), and the
Respondents'
manner in which senior executives are compensated.
B. The OAG Determined that Bitfinex and Tether Committed Fraudukat Acts;
Applied for Relief Pursuant to Section 354 of the Martin Act
As set forth in greater detail in the Whitehurst Affirmation, the OAG's investigation
uncovered substantial evidence of fraudulent conduct, which will be summarized here.
In 2018, Bitfinex placed over a billion U.S. dollars of wrongfully co-mingled client and
corporate funds, including from clients in New York, with an overseas entity called Crypto
Capital Corp., ("Crypto Capital") which Bitfinex was using as an intermediary to wire U.S.
dollars to virtual currency traders using its platform. Bitfinex gave money over to Crypto Capital
because Bitfinex was unable to find a reputable bank, anywhere in the world, that would work
traders'
with it at the time to process its deposit and withdrawal requests. (Aff. ¶ 61.) Despite
the hundreds of millions of dollars it was handing over, Bitfinex never signed a contract or other
agreement with Crypto Capital. (Id. ¶ 59.) In mid-to-late 2018, executives at Bitfinex/Tether
9 of 29
began to suspect that Crypto Capital had lost, stolen, or absconded with the funds, and as of
today, the companies have been unable to locate, much less recover, approximately $851 million
dollars handed over to Crypto Capital. None of that had been disclosed to investors. (Id. 59-
¶
60.)
In order to fill the gap, executives at Bitfinex, who also own and operate Tether, took
hundreds of millions of dollars from Tether's cash reserves, and used the cash to prop up the
Bitfinex trading platform. First, in November 2018, Bitfinex executives transferred $625 million
out of Tether's legitimate bank account, and put it into Bitfinex's legitimate bank account. In
"credited"
return, Bitfinex $625 million to Tether's accounts with Crypto Capital. (Id. ¶ 87.)
"credit"
That was illusory, though, since Bitfinex knew at the time that Crypto Capital was
refusing or unable to process withdrawals or return funds. In effect, in November 2018
Respondents fraudulently shifted most or all of Bitfinex's risk of loss of several hundred million
dollars onto Tether's balance sheet, but continued to represent to the market that tethers were
"backed"
fully by U.S. dollars sitting safely in a bank account. They were not.
Respondents then engaged in an undisclosed and conflicted transaction to give Bitfinex
even more access to Tether's reserves, and did so in a way that hindered the OAG's
investigation. As set forth in detail in the Affirmation, in the midst of the OAG's investigation,
credit"
Respondents told the OAG that they were contemplating extending a "line of on the
Tether reserves to Bitfinex in the amount of $600 to $700 million, and that the transaction was
imminent. (Id. ¶ 73.) The OAG immediately asked for clarifying documents and information,
given the highly significant, undisclosed, and facially conflicted nature of the proposed
transaction. For weeks, no significant information was provided. Over a month later, the
companies' "imminent"
counsel, for the first time, informed the OAG that the transaction had
10 of 29
already closed, on terms that were very different from what the OAG was originally told. Rather
credit"
than $600 to $700 million, the "line of was in fact for up to $900 million. And counsel
credit"
disclosed, for the first time, that the "line of transaction incorporated the November 2018
transfers of $625 million from Tether to Bitfinex described above. (Id. ¶ 85.) To date,
Respondents claim to have transferred $750 million of the Tether reserves. That leaves an
additional $150 million in reserves that could be further dissipated, at any time.
Those facts, and others, demonstrated that Respondents fraudulently misstated or omitted
material information to traders on the Bitfinex platform, holders of tether, and the wider virtual
currency market, in several respects, including:
• Bitfinex failed to disclose to clients that had lost $851 million

they approximately
of co-mingled client and corporate funds to Crypto Capital in mid-to-late 2018;
• Bitfinex knew in mid-to-late 2018 that Crypto Capital's or unwillingness

inability
to return any of the funds meant that Bitfinex faced extreme difficult in filling
client withdrawal requests, to the point that a senior Bitfinex executive repeatedly
stated in writing that the company was unable to face client withdrawal requests.
(Aff. ¶¶ 65-68.) At the same time, Bitfinex represented publicly that rumors to
fiction,"
that effect were "a targeted campaign based on nothing but and that "All
cryptocurrency and flat withdrawals are, and have been, processing as usual
interference."
without the slightest (Aff. at Ex. H);
• In November Respondents attempted to cover (at

2018, up the loss by transferring
least) $625 million to Bitfinex from the cash reserves of Tether, which, among
other things, made Tether's representations misleading, through at least February
2019, that "USDT in the market are fully backed by US dollars that are safely
deposited in our bank accounts";
• Respondents failed to disclose that, in March 2019, Bitfinex continued to access

hundreds of millions of dollars in Tether's cash reserves, up to $900 million,
which was almost half of Tether's available reserves at the time. This supposedly
length" "secured"
"arm's transaction is by shares in iFinex (i.e., Bitfinex), which
there is little reason to believe have any real value, especially in the event that
iFinex itselfdefaults.
There are other facts that support the OAG's conclusion that Respondents have violated
the Martin Act, and other New York laws, that would form the basis of an eventual complaint in
11 of 29
this matter, including but not limited to additional misstatements about the location, nature, and
extent of the Tether cash reserves.
The OAG's application also outlined how, in the course of the investigation, Respondents
failed to provide significant documentary evidence, did not provide requested information and
credit"
materials regarding the "line of transaction between Bitfinex and Tether until after the
transaction had closed, and have provided shifting narrative responses on key aspects of the
investigation.
C. Justice James Grants the OAG's Order Pursuant to Section 354
On April 24, 2019, the Honorable Debra A. James granted the OAG's application
pursuant to section 354. The 354 Order found that "it is this Court's duty to grant the Attorney
directing"
General's application for an order Bitfinex and Tether to produce various documents
material to the OAG's investigation, including documents the OAG had been seeking since
November 2018. The Order further found that "it is expedient and proper to grant certain
injunctive relief against Respondents because alleged fraudulent practices of Respondents
threaten continued and immediate injury to the public and that the potential dissipation of
Respondents' ineffectual,"
assets would render a judgment directing restitution or disgorgement
and that Respondents were enjoined from further violations of the Martin Act, as well as
"[f]urther action by Bitfinex or Tether to access, loan, extend credit, encumber, pledge, or make
Tether,"
any other claim, of any variety or description, on the U.S. dollar reserves held by
including distribution or dividend to employees or associates of the companies.
It is important to note that the 354 Order is narrowly drawn to prohibit only particular
Respondents - further transfer of Tether's cash reserves. It does other

activity by not, among
things, prohibit Bitfinex from operating its trading platform (and, for instance, earning fees from
12 of 29
clients'
its trades), nor does it prohibit Tether from issuing or redeeming tethers in exchange for
U.S. dollars in the normal course. Those sorts of ostensibly legal activities are undisturbed by
the 354 Order, and are consistent with allowing legitimate traders on the Bitfinex platform, and
legitimate holders of tether, to buy, sell, or hold their assets as they see fit.
Resp:sd:nts'
D. Motion to Vacate or Modify Raises Additional Questions
Relevant to the OAG's Investigation
On Monday April 29 at 9:44 p.m., the OAG was informed via email that Respondents
planned to file an order to show cause the next morning to vacate the 354 Order. While the legal
arguments set forth in the Motion to Vacate will be addressed in detail below, the Motion to
Vacate makes a number of new, factual statements that appear to contradict statements
previously made to the OAG, or to contradict documentary evidence previously provided to the
OAG, on issues that are central to the investigation. Those discrepancies only underscore why a
court-supervised disclosure process - and the maintenance of the status quo that process -
during
was warranted. For instance, Respondent's Motion to Vacate represents that "the amounts
transferred from Bitfinex's Crypto Capital account to Tether's Crypto Capital accounts [total]
million."
$675 (Motion at 8.) In a previous letter to the OAG, Respondents represented that the
amount transferred between the Bitfinex and Tether's Crypto Capital accounts was $625 million.
(Aff. at ¶ 85.) That is a $50 million dollar discrepancy. The Motion also contradicts what the
OAG was previously told about when Bitfinex began its relationship with Crypto Capital, the
entity at the center of the lost or stolen funds.
Most importantly, the Motion to Vacate pointedly does not characterize what
Respondents believe is Crypto Capital's actual role in this matter - a central concern of the
OAG's investigation. What Respondents do say is that "[a]s recently as April 2019, Crypto
Capital representatives continued to respond promptly to requests for information and documents
13 of 29
Bitfinex."
from (Motion to Vacate at 6.) However, based on documents provided to the OAG
by Respondents, that characterization appears to be questionable, at best. In April 2019, a senior
"Oz,"
Bitfinex executive wrote dozens (or more) messages to Crypto Capital employee
unsuccessfully seeking even minimal information about the location and status of the lost funds.
For example, the senior Bitfinex executive wrote:
You didn't provide any of the info I requested . . . . Look at my last message
and provide the info I'm requesting. Identities of attorneys isn't a secret and
needs to be shared. We've given you much latitude to resolve these situations
and months beyond your original estimates, we need to have more transparency
now.
While that and other discrepancies do not change the core issues in this case - that Bitfinex and
Tether misled their clients and investors - heighten the OAG's need to obtain
they only
documents and information in a timely, organized fashion so that the OAG may understand what
has taken place, and what continues to take place, at these companies.
E. Recent Events Underscore the Need to Maintain the Status Quo
On May 1, 2019, the United States Attorney's Office for the Southern District of New
York announced that it had charged two individuals - Reginald Fowler and Ravid Yosef - on
charges of bank fraud and operating an unlicensed money transmitting business in connection
bank"
with their operation of a "shadow that processed hundreds of millions of dollars of
unregulated transactions on behalf of numerous cryptocurrency exchanges and associated
entities, several of which are believed to be at the center of the OAG's investigation in this
matter. The Southern District of New York's Press Release, dated April 30, 2019, is attached
hereto as Exhibit C. In its Memorandum in Support of Detention of Mr. Fowler, the government
stated that "recent public reporting, which is corroborated in part through interviews conducted
in the course of this investigation, indicates that companies associated with Defendant have
14 of 29
bank."
failed to return $85I million to a client of Defendant's shadow The Memorandum
details, among other things, Fowler's use of dozens of bank accounts around the world to
deposits"
transfer millions of dollars, some of which are described as "comingled client and used
for personal purposes, and that the location of certain funds is unknown. The Memorandum in
Support of Detention is attached hereto as Exhibit D. In this setting, it is all the more important
James'
that Justice 354 Order stands to ensure the status quo and prevent more transfers of
Tether's cash reserves.
ARGUMENT
James'
Justice 354 Order is a standard application of the Martin Act, the purpose of
which is to "prevent all kinds of fraud in connection with the sale of securities and commodities
and to defeat all unsubstantial and visionary schemes in relation thereto whereby the public is
exploited."
fraudulently People v. Federated Radio Corp., 244 N.Y. 33, 38 (1926); see also
CPC Int'l v. McKesson Corp., 70 N.Y.2d 268, 277 (1987) (purpose of the Martin Act was "to
create a statutory mechanism in which the Attorney-General would have broad regulatory and
remedial powers to prevent fraudulent securities practices by investigating and intervening at the
first indication of possible securities fraud on the public"); Kralik v. 239 E. 79th St. Owners
Corp., 5 N.Y.3d 54, 58 (2005) (same). The Martin Act is New York's securities and
commodities fraud statute, authorizing the OAG to "investigate and enjoin fraudulent practices
York."
in the marketing of stocks, bonds and other securities within or from New Assured Guar.
(UK) Ltd. V. J.P. Morgan Inv. Mgt. Inc., 18 N.Y.3d 341, 349 (2011).
"fraud" practices"
Under the Martin Act, the words and "fraudulent are to be given "a
wide meaning so as to include all acts . . . which do by their tendency to deceive or mislead the
public."
purchasing Federated Radio Corp., 244 N.Y. at 38-39; see also People v. Barclays Cap.
10
15 of 29
Inc. 1 N.Y.S.3d 910, 917 (Sup. Ct. N.Y. Cty. 2015) (applying Martin Act to representations
Appeals'
about trading venues, noting that "the Court of guidance to be that doubts in favor of
the Martin Act's applicability should be resolved in the NYAG's favor. In other words, if it is a
close call, the Martin Act should be held to apply."). The OAG need not establish fraudulent
intent or reliance in Martin Act cases. State v. Rachmani Corp., 71 N.Y.2d 718 (1988); People v.
Lexington Sixty-First Assoc., 38 N.Y.2d 588 (1976).
Expedient"
A. Section 354 Authorizes "Proper and Injunctions
1. The Text ofSection 354 Empowers the Court to Issue an Injunction or Stay that
Expedient"
is "Proper and
The relevant text of section 354 is clear, and provides the standard which the reviewing
justice shall use in evaluating whether injunctive relief is to be included in the order: "Whenever
the attorney-general has determined to commence an action under this article, he may present to
any justice of the supreme court, before beginning such action, an application in writing for an
order . . . The order shall be granted by the justice of the supreme court to whom the application
has been made with such preliminary injunction or stay as may appear to such justice to be
expedient."
proper and
Section 357 of the Martin Act states that "[t]he provisions of the civil practice law and
provided."
rules shall apply to all actions brought under this article except as herein otherwise
the text of section 354 sets forth a different standard. That standard -
Accordingly, specifically
proper and expedient - is what the Legislature wrote in the and it is the standard that
statute,
Respondents.3
Justice James rightly applied in granting the 354 Order against
"action" proceeding"
Respondents argue that the word in section 357 of the Martin Act "includes a special
"action"
by virtue of CPLR § 105(b), which defines the word to include a special proceeding. Section 105(b) states
rules,"
plainly that "the definitions of this section apply to the civil practice law and which is not the Martin Act.
1l
16 of 29
2. Decades of Case Law Support the Plain Reading of the Text of Section 354
Respondents cite no case holding anything other than that the text of section 354 applies
as it is written. That is because the cases that have considered the issue have all, over a period of
- expedient."
decades, come to the same conclusion the appropriate standard is "proper and See,
e.g., Schneiderman v. Eichner, 2016 N.Y. Misc. LEXIS 2003 (Sup. Ct. N.Y. Cty. May 26, 2016);
Schneiderman v. 15 Broad Street, 2014 N.Y. Misc. LEXIS 2007 (Sup. Ct. N.Y. Cty. Apr. 25,
2014); Matter of Cenvill Communities, Inc., 82 Misc.2d 418, 421-22 (Spec. Term N.Y. Cty.
1975) (rejecting argument that a preliminary hearing was required under section 354, finding
"the provisions of the [Martin Act] which authorize a preliminary injunction or stay 'where
expedient'
proper and do not limit the court's power to provide such relief ex parte where the
circumstances require"); citing Bradford Audio Corp. v. Pious, 392 F.2d 67 (2d Cir. 1968)
(rejecting federal due process challenge of ex parte 354 order restraining transfers of corporate
assets); see also People v. George Henriques & Co., 267 N.Y. 398 (1935) ("The courts in the
exercise of their judicial function have power to grant temporary injunctions in proper case
without a hearing.").
Several courts have discussed their reasoning in detail. In 15 Broad Street, Justice James
considered this very issue and held that injunctions issued pursuant to section 354 are governed
expedient"
by the "proper and standard. 2014 N.Y. Misc. LEXIS 2007, at *4. In that case, the
respondents'
court denied motion to vacate an ex parte order:
Had the Legislature intended to apply the civil practice laws and rules with
respect to a preliminary injunction to proceedings brought under General
Business Law § 354, it would not have limited the provisions of General
Business Law § 357 to actions only. To hold otherwise would fail to give
expedient'
meaning to the phrase 'proper and under General Business Law §
354.
12
17 of 29
"mandates"
Id at *4-5. Justice James noted that section 354 requested injunctive relief that
appears to the justice to be proper and expedient "in contrast to the standards to which a judge
must adhere to grant a preliminary injunction pursuant to article 63 of the civil practice law and
rules."
Id. at *5. The court concluded that it "cannot find that such provisional relief did not . . .
application]"
appear [to be proper and expedient] to the justice [who granted the and declined to
disturb the order. Id. at *5-6. Two years later, in Eichner, Justice Rakower again considered the
- expedient"
argument raised by Respondents here whether article 63 or the "proper and standard
applies to orders and injunctions issued under section 354. 2016 N.Y. Misc. LEXIS 2003, at
expedient' - -
*20-21. Justice Rakower concluded that the "'proper and clause not the C.P.L.R.
354."
supplies the applicable standard for injunctive relief under section Id. at *25. As the court
expedient'
observed, "[s]ubstituting the CPLR standard would read the 'proper and clause out of
the statute . . . It simply runs counter to the remedial purposes of the Martin Act to interpret
expedient'
section 354 as imposing a more exacting standard than 'proper and before an action
commenced."
has been Id.
While Respondents forthrightly admit that they believe Eichner to be wrongly decided,
they decline to mention that rejecting the reasoning of the court in Eichner would necessarily
require rejecting the reasoning of Cenville, 15 Broad, and other decisions, as well several
expedient"
decades worth of 354 orders that applied the "proper and standard, several of which
were cited in the OAG's initial application. See, e.g., Matter of Edelstein, et al., Index No.
450416/2019 (April 9, 2019) (Scarpulla, J.S.C.); Matter of Laurence G. Allen, ACP Investment
Group, et al. Index No. 452346/2018 (Dec. 20, 2018) (Sattler, J.S.C.); Matter of Spitzer v.
Merrill Lynch, et al., Index No. 401522/2002 (April 8, 2002) (Schoenfeild, J.S.C.).
13
18 of 29
Appeals'
The Motion to Vacate briefly touches on the Court of 1988 decision in State v.
standards."
Fine, noting that "[t]he Attorney General did not cite Fine, nor attempt to meet its
(Motion to Vacate at 14; citing 72 N.Y.2d 967 (1988). That is because Fine concerned a plenary
action by the OAG under section 353 of the Martin Act alleging fraud in connection with the
cooperative conversion of residential buildings, not an investigatory proceeding under section
354. In Fine, the Court of Appeals addressed the standard for injunctive relief in an action under
section 353, holding that the CPLR standard should apply. Id. at 968. In so holding, the Court
recognized the distinction between plenary actions under section 353 and investigatory
proceedings under section 354:
The Legislature made plain . . . that '[the] provisions of the civil practice law
and rules shall apply to all actions brought under this article except as herein
provided'
otherwise (General Business Law § 357), and it specified no other
standard for preliminary injunction motions (cf , General Business Law § 354;
Ottinger v. State Civ. Serv. Commn., 240 N.Y. 435, 439).
"cf" "compare"
Fine, 72 N.Y.2d at 969. The use of or by the Court of Appeals contrasted
-
actions under section 353 which does not provide for any particular standard for injunctive
"defaulting" -
relief, thus to the CPLR with investigations under section 354, the text of which
expressly sets forth a different standard for an injunction or stay. See 15 Broad Street, 2014
N.Y. Misc. LEXIS 2007, at *5 ("[T]he Court of Appeals in Fine . . . contrasted the provisions of
General Business Law § 357, which was the subject of its holding, to those of . . . General
Business Law § 354.").
To suggest, as Respondents do, that Fine holds otherwise is simply wrong. Indeed, to
Appeals'
put the Court of 1988 decision in Fine in proper context, Respondents should have also
Appeals'
cited the Court of decision two years earlier in First Energy Leasing Corp. v. Attorney
19 of 29
General, wherein the Court of Appeals extensively discussed how it had "no sanction to ignore
355"
the plain language of sections 354 and of the Martin Act, and held that:
It is apparent that the Legislature, in granting to the Attorney-General the
extraordinary enforcement powers under section 354, found it appropriate to

give the subjects of those proceedings the added protection of judicial
supervision.
68 N.Y.2d 59, 64 (1986). Importantly, the Court of Appeal's observation in First Energy that
"[i]mplementation of [the requirements of section 354] must be left to the court to determine in
circumstances,"
its discretion, considering in each instance what is fair and appropriate under the
underscores the core logic of section 354 and, indeed, the Martin Act generally. That is entirely
consistent with the text and purpose of the injunctive provision of section 354, which empowers
expedient"
justices to craft injunctive relief that they believe to be "proper and under the
circumstances faced in the particular application.
Respondents'
contention that the ex parte application for an injunction violates due
process principles fails because courts have repeatedly rejected the argument that the provisions
of the Martin Act violate the Constitution. Bradford Audio, 392 F.2d at 72 (holding no violation
of due process "to enter an ex parte order for the temporary preservation of the assets"); Cenvill
respondents'
Communities, Inc., 82 Misc.2d at 421-22 (rejecting, in spite of reliance on Fuentes
v. Shevin, 407 U.S. 67, the "contention that a preliminary hearing was required under section
354"); In re MacNamara, 128 Misc. 84, 85 (Sup. Ct. N.Y. Cty. 1926) (rejecting due process
arguments despite the "rhetorical exaggerations in the language in which the objections are
Respondents'
couched"). Order to Show cause is demonstrative of their due process rights.
3. To Apply Article 63 of the CPLR Would Undermine the Statutory Framework Set
Forth By the Legislature Authorizing Early-Stage Injunctive Relief
15
20 of 29
That the standard for relief under article 63 of the CPLR does ng apply in 354
proceedings is underlined by the cases that have considered the extent to which the OAG must
articulate a potential violation of the Martin Act upon an application pursuant to section 354. In
354 proceedings, courts have held squarely that the OAG "need not establish a prima facie case
for a section 354 order, since the purpose of the inquiry is to preserve the status quo while
out."
determining whether a case can be made Abrams v. Long Beach Oceanfront Assoc. L.P.,
136 Misc.2d 137, 140 (Sup. Ct. N.Y. Cty. 1987) (emphasis added). Instead, the OAG's
application need only "set forth reasonable cause to believe that violations of the Martin Act
occurred."
have Id. at 141. The Court of Appeals has reinstated an ex parte order under section
354 where the Appellate Division "improperly applied to the merely inquisitorial order the
trial."
measure of proof that would be required at a In re Attorney-General (Am. Research
Council, Inc.), 10 N.Y.2d 108, 113 (1961).
Requiring, at this stage, that the OAG prove that it is likely to prevail on the merits of a
not-yet-existing lawsuit would, of course, require a showing that goes far beyond "reasonable
occurred,"
cause to believe that violations of the Martin Act have undermining the point of a 354
- to assist the OAG in ascertaining the facts of the matters under

proceeding investigation, prior
to its lawsuit. Nor is it clear how the OAG would establish likelihood of success on merits its
claims, since it has not yet articulated claims, including potential claims pursuant to other laws
that are not part of a 354 proceeding. The Court need not speculate, though, because there is
Respondents'
simply no way to square the holdings in cases like Long Beach Oceanfront with
attempt to apply the CPLR standard. In essence, Respondents ask this Court to reject that line of
cases, as well. The Court should decline to do so.
16
21 of 29
States'
4. The Provisions ofSection 354 Are Consistent With Other Fraud
Enforcement Authority
Respondents'
While filings (and public statements) imply that the injunctive provision of
states'
section 354 is somehow unsuual or extreme, it is neither. In fact, most other civil law
enforcement agencies have signficantly more authority to stop ongoing securities or commodities
frauds, by issuing administrative cease and desist orders which are not reviewed by a court prior
4
to service. Courts have repeatedly recognized that these cease and desist orders satisfy the
requirements of due process.
"exam"
Many other states also have authority, giving them the signficant power to review
the books, records, and other materials of industry participants, also without prior court order.
Recently, for instance, a multi-state task force of state securities regulators engaged in a
coordinated series of investigations into cryptocurrency-related investment products, resulting in
orders.5
several dozen announced cease and desist
Expedicat"
B. The Injunction Set Forth in the 354 Order was "Proper and
The OAG application to the Court was sufficient to demonstrate that there is reasonable
James'
cause to believe that violations of the Martin Act have occurred, and Justice finding that
an injunction was proper and expedient was fully supported.
1. The OAG Has Reasonable Cause to Believe that Bitfinex and Tether Violated the
Martin Act
4
New York is one of the minority of states whose securities and ccmac-dities fraud enforcement authority
sits in an elected office of the Attorney General. See In re MacNamara, 128 Misc. at 94 ("The Attorney-General
occupies a position in the administration of the Martin Act similar to those of the Commissioners under the Blue Sky
Acts.").
5 Cryptosweep,"
see North American Securities Administrators Association, "Operation available at
http://www.nasaa.org/regulatory-activity/enforcement-legal-activity/operation-cryptosweep/ (last accessed May 2,
2019).
17
22 of 29
As set forth in detail this opposition and in the OAG's application materials, Respondents
made a number of material misstatements and omissions from at least mid-2018 to the present
day which acted to deceive New York clients of Bitfinex and investors in tethers, as well as the
wider virtual currency trading markets. Among them, Respondents failed to disclose the loss of
over $850 million dollars of co-mingled corporate and client funds, and have made material (and
ongoing) misrepresentations to customers about Bitfinex's ability to process customer
withdrawals. Respondents have also made material (and ongoing) misrepresentations with
respect to the status of the cash reserves backing tether.
In a more general sense, the course of conduct demonstrated by the OAG's application
demonstrates a pattern of undisclosed, conflicted, and deceptive conduct that not only directly
impacted the purchase, sale, or exchange of virtual currency securities and commodities on the
. Bitfinex platform, like bitcoin, but that users of Bitfinex, or holder of tethers, would find material
and, indeed, essential to their decision to trade on the trading venue and in the assets offered by
Respondents. Barclays, 47 Misc. 3d at 869-70 (finding "trading decisions can be inexorably
linked to the venue in which the trade occurs").
2. The Injunction Properly Prevents Bitfinex from Further Dissipating Tether's

Cash Reserves While the OAG's Investigation Proceeds
Given that Respondents have proven themselves willing to mislead the market about
whether, how, and under what circumstances they transferred hundreds of millions of dollars out
backed"
of the "fully Tether reserves, and given the risk that, once transferred, those funds may
never be returned, it was proper and expedient for Justice James to temporarily halt such
transfers while the OAG completes its investigation. Eichner, 2016 N.Y. Misc. LEXIS 2003, at
*31 ("Insofar as [Respondent's] operation and management . . . allegedly involves 'fraudulent
practices'
in violation of the Martin Act, it is proper and expedient to include [Respondent's]
18
23 of 29
bank accounts in the Order's injunctive relief because the potential dissipation of Respondent's
assets would render a judgment directing restitution ineffectual."). Befitting the narrow scope of
the OAG's requested relief, the 354 Order does not prevent Bitfinex from engaging in the regular
course of its business as a trading platform operator, nor does it prevent Tether from issuing
more tethers to willing buyers.
It should be noted that Respondents are incorrect in suggesting that a 354 injunction can
only be issued when fraudulent conduct is ongoing. (Motion to Vacate at 20-21). No case has
ever held that, and would directly contradict the very purpose of the Martin Act, as expressed by
the Court of Appeals, which is "to create a statutory mechanism in which the Attorney-General
would have broad regulatory and remedial powers to prevent fraudulent securities practices by
public."
investigating and intervening at the first indication of possible securities fraud on the
CPC Int'l, 70 N.Y.2d at 277. In any event, the OAG's application made clear that the "OAG's
ongoing investigation seeks to determine, among other things, the extent to which New York
Tether."
investors are exposed to ongoing fraud being carried out by Bitfinex and (Aff. ¶ 94.)
(emphasis added)
C. The Injunction Granted by Justice James Would be Appropriate Under

Article 63 of the CPLR
Additionally, the OAG meets the preliminary injunctive standard pursuant to CPLR §
6301, where, as here, the OAG has demonstrated that (i) it is likely to succeed on the merits of a
Martin Act claim; (ii) irreparable injury to investors will occur if the Court were to vacate the
preliminary injunction; and (iii) a balancing of the equities favors the OAG's position. New York
v. First Investors Corp., 156 Misc. 2d 209, 213-215 (Sup. Ct. N.Y. Cty. 1992). Furthermore,
"[i]nasmuch as the Martin Act has a broad remedial purpose to protect the public interest, it may
19
24 of 29
present its own special considerations in determining what is irreparable injury and in balancing
equities."
Fine, 72 N.Y.2d at 969.
1. The OAG Has Shown that it Would Succeed in a Martin Act Claim Against
Respondents
The evidence of fraudulent conduct detailed above demonstrates that the OAG will likely
succeed on the merits of its Martin Act claim. Misstatements about Bitfinex's financial
condition and failure to disclose nearly a billion dollar loss of co-mingled client and corporate
Respondents'
assets are material to Bitfinex traders or potential holders of tether. Similarly,
"l-to-1"
failure to disclose its attempted cover-up of the shortfall (by using Tether's cash
reserves as its piggy-bank) with questionable collateral (i.e. illiquid shares in their own
company) is material to Bitfinex users and the holders of tether. Of course, in matters where the
OAG seeks a preliminary injunction in an action, "it is not a requirement for the issuance of a
preliminary injunction that the plaintiff establish with absolute certainty that it will succeed in
litigation."
the State v. Kozak, 91 Misc. 2d 394, 395 (Sup. Ct. N.Y. Cty. 1977). However, based
on the material set forth in the OAG's original 354 application, and in this opposition brief, the
manner in which Respondents engaged in fraudulent conduct is well established. Further
facts.6
investigation by the OAG will likely establish more such
6
The Motion to Vacate wrongly suggests that an eventual Martin Act claim stands or falls on whether
"tethers"
are securities or commodities. It does not. The Bitfinex trading platform transacts in both securities and
commedities (like bitcoin), and is of course at the core of the fraudulent conduct set forth in OAG's application See
Salitra v. Lefkowitz, 98 Misc 2d 343 (Sup. Ct. N.Y. Cty. 1979) (rejecting chauenge to OAG's investigatory powers
over commodities and evidences of indebtedness). Tether tokens are just one part of the alleged fraud. In any event,
whether transactions in tether constitute the purchase, sale, or exchange of commodities, securities, or other
evidences of interest or indebtedness (Gen. B. L. § 352) is a fact intensive question that is properly raised in
response to a compkint, after the completion of OAG's investigation.
20
25 of 29
2. Potential Dissipation of Assets is Irreparable Harm
In the context of a plenary Martin Act claim, an injunction should be issued when "the
Attorney-General has shown irreparable injury to the public in the form of fraud and the
defendants."
possibility of financial instability on the part of Kozak, 91 Misc. 2d at 395
(granting injunction barring "transferring or disposing of assets or property under [defendants']
control, derived from the practices alleged in the verified complaint to be fraudulent"). As with
other applications of the Martin Act, though, the court must evaluate this factor in light of the
remedial purpose of the act in protecting the public. Fine, 72 N.Y.2d at 969. Here, the OAG has
set for facts demonstrating that Respondents have engaged in fraudulent conduct in the manner
set forth in the application, and there are significant indications and serious questions (based on
Respondents own statements) about the ongoing financial position of the companies and, more
importantly, the serious risks posed to traders on Bitfinex and holders of tethers. If Bitfinex is
permitted to continue to draw on the Tether reserves (having already drawn at least $750 million
dollars), with no assurance of adequate security or ability to repay, there is significant possibility
those additional reserves will be unrecoverable. Importantly, the OAG has continued to ask for,
but has not received, documents and information that would shed even some light on the
issues"
"liquidity facing Bitfinex, the exposure of its clients, which would presumably help
inform the OAG, and the Court, about the actual financial status of the company.
3. Equity, the Cornerstone of the Martin Act, Supports Maintenance of the Status
Quo
The Martin Act is designed to protect the public, and for the reasons expressed at length
in this brief and in the OAG's initial application for relief, the equities favor preservation of
assets for the benefit of defrauded investors. See First Investors, 156 Misc. 2d at 213-215
(granting preliminary injunction, noting that the Martin Act "may present its own special
21
26 of 29
equities"
considerations in determining what is irreparable injury and in balancing and finding
that the equities favor of the OAG, where it appears likely that defendants violated the Martin
Act, and the OAG is attempting to protect public interest in lawsuit); City of New York v. Smart
Apts. LLC, 39 Misc. 3d 221, 233 (Sup. Ct. N.Y. Cty. Feb. 13, 2013) (granting preliminary
injunction noting "the equities lie in favor of shutting down an illegal, unsafe, deceptive
defendants'
business, rather than in allowing said business to continue to operate (to presumed
financial advantage)").
CONCLUSION
Respondents'
The OAG respectfully requests that the Court deny motion to vacate or
modify the Order.
Dated: May 3, 2019

New York, New York
Respectfully submitted,
LETITIA JAMES
Attorney General of the State of New York
JoÚi D. Castiglione
Senior Enforcement Counsel
Brian M. Whitehurst
Assistant Attorney General
Investor Protection Bureau
Johanna Skrzypczyk
Assistant Attorney General
Bureau of Internet and Technology
Office of the Attorney General of the

State of New York
28 Liberty Street
22
27 of 29
New York, New York 10005

Tel. (212) 416-6210
Petitioner
23
28 of 29
CERTIFICATION
I am the attorney filing this document. Pursuant to Commercial Division Rule 17, I
certify that this Memorandum of Law is 6955 words, exclusive of the caption, table of contents,
table of authorities, and signature block. The word count was generated using the Microsoft
Word 2016 application.
/s/ Brian Whitehurst
Brian Whitehurst
29 of 29

Idioma

2019 in The Matter of The I V in The Matter of The I MEMORANDUM of LAW I 56

Cargado por

Información del documento

Descripción:

Título original

Derechos de autor

Formatos disponibles

Compartir este documento

Compartir o incrustar documentos

Opciones para compartir

¿Le pareció útil este documento?

¿Este contenido es inapropiado?

Descripción:

Copyright:

Formatos disponibles

2019 in The Matter of The I V in The Matter of The I MEMORANDUM of LAW I 56

Título original:

Cargado por

Descripción:

Copyright:

Formatos disponibles

FILED: NEW YORK COUNTY CLERK 05/03/2019 11:55 PM INDEX NO.

SUPREME COURT OF THE STATE OF NEW YORK

Attorney General of the State of New York,

: Index No.: 450545/2019

Business Law in regard to the acts and practices of

in promoting the issuance, distribution, exchange, :

advertisement, negotiation, purchase, investment .

advice or sale of securities or commodities in or from .

------ ----------------------- -------- x

Attorney General of the State of New York

TABLE OF AUTHORITIES .........................................................................................................iii

PRELIMINARY STATEMENT .................................................................................................... 1

A. The OAG's Investigation of Bitfinex and Tether...................................................... 3

C. Justice James Grants the OAG's Order Pursuant to Section 354.............................. 7

E. Recent Events Underscore the Need to Maintain the Status Quo............................. 9

1. The Text of Section 354 Empowers the Court to Issue an Injunction or

Stay that is "Proper and Expedient"................................................................ 11

2. Decades of Case Law Support the Plain Reading of the Text of

3. To Apply Article 63 of the CPLR Would Undermine the Statutory

2. The Injunction Properly Prevents Bitfinex from Further Dissipating

C. The Injunction Granted by Justice James Would be Appropriate Under

2. Potential Dissipation of Assets is Irreparable Harm........................................ 21

3. Equity, the Cornerstone of the Martin Act, Supports Maintenance of the

Abrams v. Long Beach Oceanfront Assoc. L.P.,

Assured Guar. (UK) Ltd. v J.P. Morgan Inv. Mgt. Inc.,

Bradford Audio Corp. v. Pious,

City of New York v. Smart Apts. LLC,

CPC Int'l v. McKesson Corp.,

First Energy Leasing Corp. v. Attorney General,

In re Attorney-General (Am. Research Council, Inc.),

Kralik v. 239 E. 79th St. Owners Corp.,

Matter of Cenvill Communities, Inc.,

Matter of Edelstein, et al.,

Matter of Laurence G. Allen, ACP Investment Group, et al.

Matter of Spitzer v. Merrill Lynch, et al.,

New York v. First Investors Corp.,

People v. Barclays Cap. Inc.

People v. Federated Radio Corp.,

People v. George Henriques & Co.,

People v. Lexington Sixty-First Assoc.,

State v. Rachmani Corp.,

Schneiderman v. 15 Broad Street,

Article 63 ......................................................................................................................... passim

General Business Law

do since the injunction.

time as the OAG's investigation is complete.

A. The OAG's Investigation of Bitfinex and Tether

detail in the Petition/Affirmation of Brian M. Whitehurst, submitted in support of the OAG's

Whitehurst Affirmation and accompanying Exhibits is attached hereto as Exhibit A. A copy of

employees, and share common ownership.

2 All in the Petition

¶ 32, Ex. C.)

circumstances of Bitfinex's undisclosed transfer of Tether's cash reserves in 2018, Bitfinex's

uncovered substantial evidence of fraudulent conduct, which will be summarized here.

refusing or unable to process withdrawals or return funds. In effect, in November 2018

Respondents then engaged in an undisclosed and conflicted transaction to give Bitfinex

currency market, in several respects, including:

• Bitfinex failed to disclose to clients that had lost $851 million