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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

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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

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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

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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

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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

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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,

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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.

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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.

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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

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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

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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

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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

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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

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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

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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

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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.

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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.

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"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.).

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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

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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

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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.

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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).

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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]

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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

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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.

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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

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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

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New York, New York 10005


Tel. (212) 416-6210

Petitioner

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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

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