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SUPREME

COUNTY

COURT

OF NEW

----------- ----

In

the

Attorney

Matter

of

General

the

of

OF

THE

YORK

------

Inquiry

the

State

by

Pursuant

Business

to

Law

article

in

23-A

regard

Petitioner,

of

to

the

the

STATE

- -----------

LETITIA

of

New

OF

NEW

JAMES,

York,

New

acts

York

General

and

practices

iFINEX

TETHER

INC.,

BFXNA

HOLDINGS

OPERATIONS

TETHER

LIMITED,

INTERNATIONAL

in

promoting

advertisement,

advice

New

or

York

sale

the

issuance,

negotiation,

of

securities

State.

INC.,

LIMITED,

BFXWW

INC.,

TETHER

TETHER

LIMITED,

exchange,

investment

in

or

LIMITED

Respondents,

distribution,

purchase,

or

commodities

------

-----------------------

--------

YORK

--

--

 

x

:

:

Index

No.:

450545/2019

of

 

:

:

.

:

:

:

.

from

.

:

x

MEMORANDUM

VACATE

OR

MODIFY

OF

LAW

IN

OPPOSITION

THE

APRIL

24,

BUSINESS

2019

LAW

TO

ORDER

§

354

RESPONDENTS'

PURSUANT

TO

MOTION

GENERAL

LETITIA

Attorney

28

Liberty

New

York,

JAMES

General

of

the

State

Street

New

York

10005

of

New

York

Petitioner

TO

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TABLE

OF

CONTENTS

TABLE

OF

CONTENTS

TABLE

OF

AUTHORITIES

PRELIMINARY

BACKGROUND

STATEMENT

iii

A.

B.

C.

D.

E.

ARGUMENT

A.

B.

The

OAG's

The

Applied

OAG

for

Investigation

Determined

Relief

that

Pursuant

of

Bitfinex

Bitfmex

to

Section

and

Tether

and

Tether

of

354

Committed

the

Martin

Justice

James

Respondents'

Relevant

Recent

to

the

Events

Grants

Motion

OAG's

the

to

Underscore

OAG's

Order

Vacate

or

Investigation

the

Need

Modify

to

Pursuant

Raises

Maintain

to

Section

Additional

the

Status

Fraudulent

Act

354

Questions

Quo

Section

354

Authorizes

"Proper

and

Expedient"

Injunctions

1.

2.

3.

4.

The

The

Stay

Text

that

Decades

Section

of

is

of

354

Section

"Proper

Case

Law

354

and

Empowers

Expedient"

Support

the

the

Plain

Court

to

Reading

Issue

of

the

an

Injunction

Text

of

To

Framework

Apply

Relief

Article

Set

63

Forth

of

the

By

the

CPLR

Would

Legislature

Undermine

Authorizing

The

Provisions

Enforcement

of

Section

Authority

354

Are

Consistent

With

the

Statutory

Early-Stage

Other

States'

Injunction

Set

Forth

in

the

354

Order

was

"Proper

and

Expedient"

Acts;

or

Injunctive

Fraud

1.

The

Violated

OAG

Has

Reasonable

the

Martin

Act

Cause

to

Believe

that

Bitfinex

and

Tether

i

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i

1

3

3

4

7

8

9

10

11

11

12

15

17

17

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2.

The

Injunction

Properly

 

Tether's

 

Cash

Reserves

C.

The

Injunction

Granted

by

Article

63

of

the

CPLR

1.

The

OAG

Has

Shown

 

Respondents

 

2.

Potential

 

Dissipation

3.

Equity, the Cornerstone

 

Status Quo

 

CONCLUSION

 

Prevents

Bitfinex

While

the

OAG's

Justice

James

Would

that

it

Would

Succeed

of

Assets

is

Irreparable

of

the

Martin

Act,

from

Further

Dissipating

 

Investigation

Proceeds

 

18

be

Appropriate

Under

 

19

 

in

a Martin

Act

Claim

Against

 

20

 

Harm

21

Supports

Maintenance

of

the

 

21

22

11

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NYSCEF DOC. NO. 56 TABLE OF AUTHORITIES CASES Abrams v. L o n g 136

NYSCEF DOC. NO. 56

TABLE

OF

AUTHORITIES

CASES

Abrams

v.

Long

136 Misc.2d

Beach

137

Oceanfront

(Sup.

Ct.

N.Y.

Assoc.

Cty.

L.P.,

1987)

Assured

Guar.

18 N.Y.3d

(UK)

341

Ltd.

(2011)

v J.P.

Morgan

Inv.

Mgt.

Inc.,

Bradford

Audio

392 F.2d

67

City

of

New

39 Misc.

York

3d

Corp.

(2d

v.

221

v.

Cir.

Smart

(Sup.

Pious,

1968)

Apts.

Ct.

LLC,

N.Y.

Cty.

CPC

Int'l

v.

70 N.Y.2d

First

Energy

68 N.Y.26

McKesson

268

(1987)

Corp.,

Leasing

59

Corp.

(1986)

In

re

Attorney-General

10 N.Y.2d

108

(Am.

(1961)

v.

Attorney

Research

2013)

General,

Council,

Inc.),

In

re

MacNamara,

 
 

128

Misc.

84

(Sup.

Ct.

N.Y.

Kralik

v.

239

E.

79th

St.

Owners

 

5 N.Y.3d

54

(2005)

Matter

 

of

Cenvill

Communities,

 

82 Misc.2d

418

(Spec.

Matter

Index

of

Edelstein,

No.

et

450416/2019

al.,

Term,

(April

Cty.

Corp.,

1926)

Inc.,

N.Y.

Cty.

9,2019)

1975)

Matter

Index

of

Matter

of

Index

Laurence

No.

G.

452346/2018

Allen,

Spitzer

No.

v.

Merrill

401522/200216

New

York

v.

First

Investors

156

Misc.

2d

209

(Sup.

ACP

Investment

(Dec.

20,

Lynch,

(April

et

Corp.,

Ct.

N.Y.

2018)

al.,

8,

Cty.

2002)

1992)

Group,

iii

4 of 29

et

al.

10,

14,

1O

12,

16

1O

13

INDEX NO. 450545/2019 RECEIVED NYSCEF: 05/03/2019

16

22

15,

13

13,

13

19,

Page(s)

15

19

15

17

15

21

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People

v.

Barclays

Cap.

1 N.Y.S.3d

910

(Sup.

People

v.

Federated

Radio

244

N.Y.

33

(1926)

People

v.

George

Henriques

267

N.Y.

398

(1935)

Inc.

Ct.

N.Y.

Corp.,

&

Co.,

Cty

People

v.

Lexington

38

N.Y.2d

588

State

v.

Rachmani

71

N.Y.2d

718

Salitra

v.

Lefkowitz,

98 Misc

2d

343

Sixty-First

(1976)

Corp.,

(1988)

(Sup.

Ct.

Assoc.,

N.Y.

Cnty

Schneiderman

2014

N.Y.

v.

Misc.

15

Broad

LEXIS

Street,

2007

Schneiderman

State

Sup.

Ct.

Fine,

72 N.Y.2d

v.

v.

N.Y.

967

STATE

CPLR

STATUTES

Eichner,

Cty,

May

(1988)

26,

2016

2015)

1979)

Article

63

General

Business

Law

§

352

1,

§

353

§

354

§

357

 

10,

18

1O

12

11

11

 

20

 

passim

passim

14

 

passim

 

20

 

passim

passim

passim

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Letitia

James,

Attorney

General

 

of

the

State

of

New

York,

respectfully

submits

 

to

Respondents'

 

Motion

to

Vacate

or

Modify

the

April

24,

2019

Ex

Parte

Order,

Immediate

 

Stay

of

the

Order,

dated

April

30,

2019

(hereinafter,

"Motion

to

Vacate"),

 

to

vacate

or

modify

the

Order

Pursuant

to

General

 

Business

Law

§

354

by

the

Debra

A.

James,

dated

April

24,

2019,

directing

the

production

of

documents

and

and

ordering

certain

preliminary

injunctive

relief

(hereinafter,

"354

Order").

 

PRELIMINARY

 

STATEMENT

 

almost

one

hundred

years,

the

Office

 

of

the

Attorney

 

General

("OAG")

 

has

been

 

by

General

Business

Law

§

352

et

seq.,

commonly

known

as

the

Martin

Act,

to

 

of

suspected

fraud

in

connection

with

the

purchase,

sale,

or

exchange

of

and

commodities.

 

While

the

text

of

the

Act

has

changed

 

over

time,

section

354

of

the

"Examination

of

witnesses

and

preliminary

injunction,"

 

is

original,

 

adopted

with

 

in

1921.

Relevant

to

this

matter

is

the

language

of

section

354

empowering

the

an

injunction:

"The

order

shall

be

granted

by

the

justice

of

the

supreme

court

to

application

 

has

been

made

with

such

preliminary

injunction

 

or

stay

as

may

appear

to

to

be

proper

and

expedient."

 

that

have

reviewed

 

the

matter

since

the

inception

 

of

the

Act

have

held

consistently

of

section

354

means

just

what

it

says:

the

standard

which

a justice

 

must

use

in

the

OAG's

 

application

 

for

an

injunction

 

is

that

of

"proper

 

and

expedient."

That

 

different

 

from

that

applicable

to

an

application

 

for

a temporary

restraining

order

or

injunction

 

under

the

article

63

of

the

Civil

Practice

 

Law

and

Rules.

But

that

is

for

 

The

Martin

Act

is

an

equitable

and

remedial

statute,

 

empowering

 

the

OAG

to

act

the

public

against

whatever

 

"visionary

 

schemes"

might

be

discovered

and,

hopefully,

an

sought

For

investigations

the

a

Petitioner

this

and

which

opposition

for

Honorable

information,

empowered

conduct

securities

Act,

law's

court

whom

such

that

entitled

passage

to

issue

the

justice

Courts

the

text

evaluating

standard

is

preliminary

good

reason.

to

protect

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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

enjoin

conduct

in

the

manner

 

that

the

justice

finds

"proper

and

expedient"

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,

reviewing

justice

and

expedient."

James'

 

354

Order

time

as

the

OAG's

and

hold

that

upon

application

shall

grant

On

that,

or

prohibiting

investigation

such

injunction

or

any

other

standard,

further

transfers

 

is

complete.

 

for

stay

the

from

ex parte

relief

under

"as

Court

the

may

appear

to

should

decline

Tether

reserves

section

such

to

to

justice

disturb

Bitfinex,

354,

to

the

be

Justice

until

proper

such

to

2

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BACKGROUND

A.

The

OAG's

Investigation

of

Bitfinex

and

Tether

 

The

full

background

of

the

OAG's

detail

in

the

Petition/Affirmation

 

of

Brian

investgiation

M.

Whitehurst,

of

Bitfinex

submitted

and

in

application

for

the

Whitehurst

Affirmation

354

the

Memorandum

of

Order,

Law

and

is

and

the

accompanying

accompanying

attached

hereto

Exhibits

as

Exhibit

memorandum

is

attached

hereto

B.

Relevant

of

to

Tether

support

law.'

as

A

Exhibit

is

of

set

the

copy

A.

this

opposition,

the

OAG

commenced

an

invesgtiation

into

Bitfinex,

which

operates

a virtual

currency

forth

in

OAG's

of

A

the

copy

in

2018

trading

of

platform

on

which

exchanged.

Tether

currency

exchange,

21-28.)2

Unlike

tether

is

a so-called

supposed

to

have

several

is

the

dozen

issuer

of

virtual

a virtual

currency

in

for

which

value

operated

 

securities

 

and

currency

also

called

tether,

New

York,

under

the

ticket

which

the

market

price

 

refers

to

a virtual

currency

-

in

the

case

of

tethers,

one

by

the

same

small

group

of

 

tether

every

outstanding

commodities

in

reserve.

(Id.

30.).

tether

is

always

backed

is

always

equivalent

to

(like

bitcoin)

on

are

virtual

(Aff.

which

symbol

is

traded

"USDT."

often

is

dollar

including

virtual

"stablecoin,"

same

Tether

exchanges

currencies,

a term

real-dollar

are

most

fluctuates,

wildly,

that

U.S.

executives

always

per

and

the

tether.

(Id.

28.)

Bitfinex

employees,

and

share

 

Tether

has

market,

the

company

Tether

represented

currency

held

in

our

Docket

No.

l.

appears

as such

on the

"Aff.

_"

will

refer

2

All

definitions

and

long

to

the

common

ownership.

represented

that

holds

the

one

market

reserves.

U.S.

So

that

I

for

issued

and

trading

for

in

the

years

dollar

"Every

USDT

For

example,

1-to-1,

by

several

traditional

1 USD."

(Whitehurst

Aff.

Upon

docket.

filing,

For

document

the

Affirmation

reference,

was

and

re-styled

continuity

by

the

with

Ex

Parte

Office

prior

as a "Petition,"

filings,

and

to

ease of

the OAG's

references

to that

in

Petition

are hereby

incorporated.

3

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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

tether

 

is

also

 

1-to-1

pegged

to

the

dollar,

so

1 USDT

 

is

always

valued

by

Tether

at

1 USD."

(Id.

32,

Ex.

C.)

 

The

OAG's

investigation

 

focused

on,

among

 

other

things,

the

manner

 

and

timing

of

 

issuances

 

of

tether,

the

nature

of

the

 

relationship

 

between

Bitfinex

 

and

Tether,

Respondents'

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

manner

in

which

Respondents'

 

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