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450545/2019
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SUPREME COURT OF THE STATE OF NEW YORK

COUNTY OF NEW YORK

In the Matter of the Inquiry of LETITIA JAMES,

Attorney General of the State of New York,

Petitioner,

—against—
Index No.: 450545/2019
iFINEX INC., BFXNA Inc., BFXWW INC.,
TETHER HOLDINGS LIMITED, TETHER
OPERATIONS LIMITED, TETHER LIMITED,
TETHER INTERNATIONAL LIMITED,

Respondents.

RESPONDENTS’ MEMORANDUM OF LAW IN SUPPORT OF

THEIR MOTION, BY ORDER TO SHOW CAUSE,
TO VACATE OR MODIFY THE APRIL 24, 2019 EX PARTE ORDER,
AND FOR AN IMMEDIATE STAY OF THE ORDER

MORGAN, LEWIS & BOCKIUS LLP

101 Park Avenue
New York, NY 10178
(212) 309-6000

STEPTOE & JOHNSON LLP

1114 Avenue of the Americas
New York, New York 10036
(212) 506-3900

April 30, 2019 Counsel for Respondents

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TABLE OF CONTENTS
INTRODUCTION .......................................................................................................................... 1

BACKGROUND ............................................................................................................................ 5

Bitfinex and Tether ............................................................................................................. 5

Bitfinex’s Banking Relationships and Dealings with Crypto Capital ................................ 5

The Line-of-Credit Transaction .......................................................................................... 6

Tether’s Disclosures............................................................................................................ 8

Tether Holders Are Not At Risk ......................................................................................... 9

The Attorney General’s Investigation and Respondents’ Extensive Cooperation............ 10

The Attorney General’s Ex Parte Application.................................................................. 10

DISCUSSION ............................................................................................................................... 11

I. The Court Has Broad Discretion to Immediately Stay and

Ultimately Vacate or Modify the April 24, 2019 Order ....................................... 11

II. The April 24, 2019 Should Be Vacated or Modified ............................................ 12

A. The Indefinite Ex Parte Order Was Issued

Without Basic Due Process Protections .................................................... 12

B. The Attorney General’s Ex Parte Application Should Have Been

Governed by the Traditional Standards for a Preliminary Injunction....... 14

C. The April 24, 2019 Order Cannot Be Justified

Under the Traditional Preliminary Injunction Standards .......................... 16

1. The Attorney General Will Not Succeed on the Merits ................ 16

a. The Martin Act .................................................................. 16

b. The Attorney Has Not Shown Tether is a

Security or Commodity Covered by the Martin Act ......... 17

c. Tether Disclosed that Its Reserves

Included Affiliate Loans ................................................... 18

d. The Attorney General Is Unlikely to

Obtain Any Relief on the Merits ....................................... 20

2. The Attorney General Has Not Shown Any Irreparable Harm..... 21

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3. The Balance of Equities Favors Bitfinex and Tether .................... 22

D. A Preliminary Injunction Is Not “Proper and Expedient” ........................ 22

III. The April 24, 2019 Order Should Be Immediately

Stayed Pending a Decision on This Application................................................... 23

CONCLUSION ............................................................................................................................. 23

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TABLE OF AUTHORITIES

Page(s)

Cases

In re AIG Advisor Group Sec. Litig.,

309 F. App’x 495 (2d Cir. 2009) .............................................................................................19

All Seasons Resorts v. Abrams,

68 N.Y.2d 81 (1986) ................................................................................................................18

Anwar v. Fairfield Greenwich Ltd.,

728 F. Supp. 2d 354 (S.D.N.Y. 2010)......................................................................................16

Attorney General v. Katz,

55 N.Y.2d 1015 (1982) ............................................................................................................15

Barry v. Barchi,
443 U.S. 55 (1979) ...................................................................................................................13

CPC Int’l Inc. v. McKesson Corp.,

70 N.Y.2d 268 (1987) ..............................................................................................................16

Dairymen, Inc. v. Hardin,

369 F. Supp. 1102 (E.D. Tenn. 1974) ......................................................................................13

Datil v. Watson,
97 Civ. 4970, 1997 WL 715680, at *1 (S.D.N.Y. Nov. 13, 1997) ..........................................21

Firemen’s Ins. Co. of Newark, New Jersey v. Keating,

753 F. Supp. 1146 (S.D.N.Y. 1990).........................................................................................22

Matter of Fosmire v. Nicoleau,

144 A.D.2d 8 (2d Dep’t 1998) .................................................................................................12

Fuentes v. Shevin,
407 U.S. 67 (1972) ...................................................................................................................12

Kerusa Co. LLC v. W10Z/515 Real Estate Ltd. Partnership,

879 N.Y.S.2d 17 (2009) .....................................................................................................16, 19

Lehman Bros. Comm’l Corp. v. Minmetals Int’l Non-Ferrous Metals Trading Co.,
179 F. Supp. 2d 159 (S.D.N.Y. 2001)......................................................................................18

Margolies v. Encounter,
42 N.Y.2d 475 (1977) ..............................................................................................................22

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Pan Am. World Airways, Inc. v. Flight Engineers’ Int’l Ass’n,

306 F.2d 840 (2d Cir. 1962).....................................................................................................13

People v. Landes,
84 N.Y.2d 655 (1994) ........................................................................................................17, 19

Rosemont Enters. v. Irving,

49 A.D.2d 445 (1st Dep’t 1975) ..............................................................................................11

Schneiderman v. Eichner,
No. 451536/2014, 2016 WL 3057994, at *1 (N.Y. Sup Ct. May 26, 2016) ......................14, 15

SEC v. Am. Bd. of Trade, Inc.,

751 F.2d 529 (2d Cir. 1984).....................................................................................................21

State v. Fine,
72 N.Y.2d 967 (1988) ..................................................................................................14, 15, 16

Uniformed Firefighters Ass’n v. New York,

79 N.Y.2d 236 (1992) ..............................................................................................................22

Wilson v. Merrill Lynch & Co., Inc.,

671 F.3d 120 (2d Cir. 2011).....................................................................................................19

Statutes

N.Y. Gen. Bus. L. § 352 ....................................................................................................16, 17, 18

N.Y. Gen. Bus. L. § 353 .............................................................................................15, 16, 20, 21

N.Y. Gen. Bus L. § 354 ...............................................................................................10, 13, 14, 15

N.Y. Gen. Bus. L. § 357 ..........................................................................................................14, 15

Other Authorities

CPLR 103(b) ..................................................................................................................................15

CPLR 105(b) ..................................................................................................................................15

CPLR 510.......................................................................................................................................15

CPLR 2201.....................................................................................................................................12

CPLR 2214.....................................................................................................................................12

CPLR 5015.....................................................................................................................................12

CPLR 6313.....................................................................................................................................13

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CPLR 6314.....................................................................................................................................11

David D. Siegel, New York Practice § 4 (6th ed. 2018) ...............................................................15

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INTRODUCTION

By this motion, the respondents, a group of affiliated companies in the virtual currency

industry, seek to vacate or modify a highly-disruptive preliminary injunction and document

demand order that the New York Attorney General obtained last week in connection with an

anticipated enforcement proceeding under the Martin Act. The order effectively freezes a line-

of-credit transaction among the respondents indefinitely, and orders them to produce huge

volumes of documents by this Friday.

The Attorney General’s application was made without any prior notice or opportunity to

be heard, even though the respondents and their counsel have been cooperating for months with

the Attorney General’s investigation. The papers supporting the Attorney General’s ex parte

application were riddled with factual and legal errors. When the true facts are considered under

the correct legal standards, it is clear that the order never should have issued.

Three of the respondents, iFinex Inc., BFXNA Inc., and BFXWW Inc. (collectively,

“Bitfinex”), operate one of the world’s largest virtual currency trading platforms, Bitfinex. The

other respondents, Tether Holdings Limited, Tether Operations Limited, Tether Limited and

Tether International Limited (collectively “Tether”), are the companies that created and

administer a virtual currency called “tether.” Bitfinex and Tether have some overlapping

ownership with Bitfinex, and share certain personnel.

Tethers are a form of “stablecoins,” which means their value is pegged to traditional

currency (such as U.S. Dollars or Euros), which is referred to in the industry as “fiat” currency.

Stablecoins are generally not bought for investment purposes, but provide a medium of exchange

across virtual currency platforms that is often more convenient than traditional currency.

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The Attorney General’s allegations in this matter center on a supposedly “conflicted”

$900 million revolving line of credit that Tether recently entered into with Bitfinex. The

preliminary injunction prohibits Bitfinex from accessing this line of credit indefinitely.

According to the Attorney General, the line of credit needed to be frozen because it

improperly impairs the reserves Tether would use for redemptions. The Attorney General

appears to believe that Tether must hold $1 in cash fiat currency for every dollar of tether. These

allegations are wrong on multiple levels.

For starters, contrary to the portrayal in the Attorney General’s motion papers of a

“conflicted” transaction, the terms were negotiated on an arm’s length basis on commercially

reasonable terms, with each company represented by sophisticated, independent counsel. The

line of credit earns interest, and is backed by the ownership shares in the parent company of

Bitfinex, one of the largest virtual currency exchanges in the world.

More fundamentally, the Attorney General has no authority to dictate how Bitfinex and

Tether do business with one another, or the amount of reserves that Tether must hold. The

Martin Act is an antifraud statute enacted to ensure that there is proper disclosure about the risks

associated with the sale of securities and commodities. So long as there is disclosure, the

members of the public can decide for themselves whether to buy or sell. Here, there was

disclosure of the relevant information. Tether states plainly on its website that tethers are backed

by reserves in various forms, specifically including “loans” to “affiliated entities.” This fact was

widely covered in industry press. Any tether holder dissatisfied with this arrangement could

have freely redeemed his or her tethers for cash, or exchanged their tether for another virtual

currency on various virtual currency platforms, and can still do so today.

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While the Attorney General claims it needed to take “immediate action to protect New

York investors,” it has not named a single one harmed in any way. Nor could it. There are no

“investors” in tether. Further, the value of Tether’s reserves is more than sufficient to cover the

outstanding tether in the market. In fact, Tether’s reserves of cash and cash equivalents alone

(without the line of credit) would cover approximately 74 percent of the outstanding amount of

tether. This sort of “fractional” reserving arrangement is similar to how commercial banks work.

No bank holds in liquid cash more than a small percentage of depositors’ money. The funds are

invested. The markets clearly remain confident in tether, as it currently trades just shy of $1

dollar per U.S. Dollar tether — even after the Attorney General’s highly inflammatory and

misleading public application. Any suggestion that tether holders face liquidity risk is

unsupported speculation.

The Attorney General’s preliminary injunction application not only misrepresents the

line-of-credit transaction as a fraud, but is also highly misleading in portraying Bitfinex and

Tether as stonewalling the investigation. In fact, the complete opposite is true. Omitted from the

Attorney General’s application is the Attorney General’s extensive correspondence with Bitfinex

and Tether showing that Bitfinex and Tether have cooperated fully, and have produced huge

volumes of information. More candor should be expected of the Attorney General, particularly

when proceeding ex parte.

That the Attorney General obtained an ex parte, indefinite preliminary injunction without

even a date for Bitfinex and Tether to be heard is inconsistent with basic due process protections,

and grounds alone for the April 24, 2019 Order to be vacated.

Beyond the due process issue, this Court has broad discretion to vacate or modify the

April 24, 2019 Order, and should do so. Specifically, the April 24, 2019 Order should be

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vacated entirely or, at a minimum, the portion disrupting the companies’ daily business

(subparagraph “(i)” on page 4) should be deleted. The Attorney General has failed to even

attempt to meet the necessary elements for a preliminary injunction: that it is likely to succeed

on the merits, that there is a risk of irreparable harm, or that the balance of equities favors the

Attorney General. While the Attorney General claims that these standards are inapplicable in a

Martin Act special proceeding like this one, that is wrong, and contrary to controlling authority

from the Court of Appeals.

The Attorney General is not likely to succeed because it has failed to even show how

tether could be a security or commodity covered by the Martin Act. Beyond that fundamental

problem, the supposedly hidden information (that reserves would be deployed to affiliate loans)

was, in fact, disclosed by Tether publicly, and so there is no fraud. Nor is there a risk of harm to

anyone, much less harm that is irreparable, given that Tether is more than adequately reserved.

Tether customers have at all times been able to freely redeem their tethers. The balance of

equities favors Bitfinex and Tether because the line-of-credit transaction is important to ensuring

that Bitfinex customers have ready access to cash. On the other side of the ledger, the Attorney

General’s injunction serves no useful purpose, except to generate headlines (as appears to be the

purpose of the exercise).

Given the urgency of the matters in this application, the Court should sign the

accompanying Order to Show Cause, immediately suspending the April 24, 2019 Order pending

a prompt hearing date on this application.

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BACKGROUND

Bitfinex and Tether

Bitfinex is among the largest virtually currency trading platforms in the world. (April 30,

2019 Affirmation of Stuart Hoegner (“Hoegner Aff.”) ¶ 3.) It was founded in 2012, and it is the

world’s largest exchange by volume for trading Bitcoin against the U.S. Dollar. (Id.)

Tether operates a platform to store, send, and make purchases of a digital token known as

tether, and is also responsible for issuing tether. (Id. ¶ 4.) Tethers are a form of “stablecoins,”

which means their value is pegged to traditional currency (U.S. Dollars, Euros, or Japanese Yen).

(Id. ¶ 6.) With certain restrictions, tethers can be redeemed on a one-to-one basis for the

traditional currency in which they are denominated. (Id.)

Stablecoins, such as tether, provide significant utility in the virtual currency market,

allowing users to convert cash into digital currency, and to anchor (or tether) the value of digital

currency to the price of traditional fiat currencies. (Id. ¶ 7.) Tethers also provide a medium of

exchange across a wide range of trading platforms that is often more convenient than traditional

currency. (Id. ¶ 8.) Stablecoins are generally not bought for investment purposes; their main

function is to facilitate other virtual currency transactions. (Id. ¶ 9.)

Bitfinex’s Banking Relationships and Dealings with Crypto Capital

Virtual currency exchanges and businesses face significant challenges in identifying and

maintaining traditional banking relationships, due in large part to heavy compliance costs. (Id.

¶ 11 & Ex. A.) Bitfinex and Tether have faced these problems from time to time.

In light of such difficulties, Bitfinex and Tether have continued to seek long-term

relationships with traditional financial institutions, while further relying on third-party payment

processors. (Id. ¶ 14.) To that end, Bitfinex established a relationship with payment processor

known as Crypto Capital in or about January 2015. (Id. ¶ 15.) Bitfinex strengthened its

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relationship with Crypto Capital in the immediate aftermath of a service disruption from a

traditional bank (Wells Fargo). (Id.) Indeed, in or about 2017 and 2018, Crypto Capital

processed hundreds of millions of dollars’ worth of transactions on behalf of Bitfinex. (Id.)

In light of Crypto Capital’s provision of once reliable payment-processing services,

Bitfinex opened additional accounts with Crypto Capital thereafter for the purpose of processing

Euro, Pound Sterling, and Japanese Yen transactions, among other currencies. (Id. ¶ 16.)

Likewise, Bitfinex entrusted Crypto Capital with an increasing amounts of funds. (Id.)

In or about mid-2018, other virtual currency trading platforms purportedly using Crypto

Capital began to experience delays in withdrawal requests. (Id. ¶ 17.) In or about August 2018,

Crypto Capital continually represented to senior executives of Bitfinex that funds had been the

subject of a partial governmental seizure and were expected to be released shortly. (Id. ¶ 18.)

Since this time, at least one governmental entity has confirmed that it was involved in the seizure

of Crypto Capital funds. (Id.)

Notwithstanding the foregoing, Crypto Capital continued to provide payment-processing

services to Bitfinex through approximately October 2018. (Id. ¶ 19.) As recently as April 2019,

Crypto Capital representatives continued to respond promptly to requests for information and

documents from Bitfinex. (Id.)

The Line-of-Credit Transaction

Beginning in or about August 2018, and continuing through in or about November 2018,

Bitfinex entered into a series of transactions whereby tethers issued by Tether to Bitfinex were

purchased through account transfers between Bitfinex and Tether’s accounts at Crypto Capital.

(Id. ¶ 21.) Throughout these transactions, all U.S. Dollar tether issued or redeemed was reserved

by an equivalent amount of value in U.S. Dollars. (Id.) Additionally, customer requests to

purchase, sell, or redeem for cash value U.S. Dollar tether continued unabated. (Id.)
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Likewise, Bitfinex and Tether also engaged in a series of transfers of fiat currency

previously deposited with Crypto Capital from Bitfinex’s account to Tether’s account there. (Id.

¶ 22.) In turn, Tether transferred equivalent amounts to Bitfinex between the companies’

respective accounts at Deltec Bank & Trust Limited. (Id.)

At the time, Bitfinex and Tether believed that withdrawals at Crypto Capital would

resume, and the companies would once more have unencumbered access to the funds entrusted

to Crypto Capital. (Id. ¶ 23.) It is only with the benefit of hindsight that the Attorney General

now claims that the transfers were inadequate, or that some undefined harm might have occurred

then (or now) if every holder of the more than $2 billion in U.S. Dollar tether in circulation were

to redeem their tether at once. (Id.)

In any event, it was for the protection of the market that, when in December 2018 senior

executives of Bitfinex grew concerned that Crypto Capital may fail to return funds held there, the

companies began to negotiate a credit facility through which Tether would extend Bitfinex a

secured, revolving line of credit of up to $900 million. (Id. ¶ 24.)

Separate, independent counsel were retained for both Bitfinex and Tether. (Id. ¶ 25.)

White & Case LLP represented Tether and Herbert Smith Freehills represented Bitfinex. (Id.)

In addition, final authority to negotiate and approve the transaction on the Tether side was

delegated to a Tether executive who was not an officer, employee or shareholder in Bitfinex.

(Id.) Over the next three months the credit facility was negotiated and memorialized. (Id.)

While the Attorney General wonders what “benefit[s] would accrue to Tether, or holders of

tethers, from this transaction” (NYAG Br. 10), the obvious answer is that Tether and holders of

tether are keenly interested in ensuring that one of the dominant trading platforms of tethers has

sufficient liquidity for normal operations. (Hoegner Aff. ¶ 25.) Further, as the companies are

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known to be affiliated, disruption to Bitfinex’s operations would naturally risk creating negative

spillover to Tether, as well. (Id.)

Without any obligation or request to do so, counsel for Bitfinex and Tether voluntarily

disclosed the nature of the transaction approximately one month before it was closed, providing

the Attorney General a general overview of the anticipated deal. (Id. ¶ 27.)

Contrary to the Attorney General’s portrayal, it was for Tether’s protection that the

amounts transferred from Bitfinex’s Crypto Capital account to Tether’s Crypto Capital account

(totaling $675 million) were incorporated into the credit facility, and deducted from the $900

million of credit made available to Bitfinex. (Id. ¶ 28.) Put differently, the credit facility

obligated Bitfinex to repay Tether the amounts held in Tether’s Crypto Capital account on

commercially reasonable terms (i.e., a term of three years and interest rate of 6.5%). (Id.) The

credit facility further provides clear terms governing future requests by Bitfinex to utilize any

portion of the remaining line of credit, and provides terms for the repayment. (Id.)

Tether’s Disclosures

In February 2019, well before the line-of-credit transaction closed, Tether updated the

disclosures on its website to specify that its reserves “may include other assets and receivables

from loans made by Tether to third parties, which may include affiliated entities.” (Id. ¶ 31 & Ex.

B, at 6 (Item 1.1.32).) The website also made clear that risks in buying tether included risks

associated with the reserves: “Assets backing digital assets such as Tether Tokens, including

loan receivables owed to Tether, are subject to the risk of default, insolvency, inability to collect,

and illiquidity.” (Id. Ex. C, at 2 (Item 7).)

The industry press covered these changes. In March 2019, Bitcoin Magazine published

an article under the headline, “Tether Updates Website, Says USDT Backed by ‘Reserves,’ Not

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Just Cash.” (Id. Ex. D.) The same day, Marketwatch published an article with the headline,

“Tether reverses claim of 100% dollar backing, sparking criticism.” (Id. Ex. E.)

For whatever alleged “criticism” the change engendered, however, the markets remained

confident in tether, as it continued to trade at par or better (i.e., $1 for every U.S. Dollar Tether,

or USDT) after the reporting. (Id. ¶ 32 & Ex. F, at 2 (showing closing price of tether at $1.00

and $1.01 on March 14 and 15, 2019, respectively).)

Tether Holders Are Not at Risk

Neither the updated disclosure nor the line-of-credit transaction itself has impeded

Tether’s ability to process redemptions. (Id. ¶ 33.) At present, Tether has cash and cash

equivalents (i.e., short-term securities) on hand totaling approximately $2.1 billion, representing

approximately 74 percent of the current outstanding tethers. (Id.) Between December 2018 and

April 29, 2019, the average daily fiat redemption has been $566,066.00, with the largest being

$24.2 million. (Id.) The vast majority of redemption requests of Tether are for less than $1

million. (Id.) Even if Bitfinex fully draws on the remaining amount of the line of credit, the

reserves will still be just below $2 billion, representing approximately 68% percent of the current

outstanding tethers. (Id.)

Beyond Tether’s cash on hand and cash equivalents, additional reserves are available,

though in less liquid form. (Id. ¶ 34.) That Tether does not keep liquid, cash reserves equal to

100 percent of the outstanding tethers is not only disclosed to customers, but hardly a novel

concept. (Id.) Commercial banks operate under a “fractional reserve” system whereby they keep

cash on hand representing only a small fraction of customer deposits, deploying the rest via

investments. (Id.) According to the Federal Reserve website, the banks must keep cash reserves

representing, at most, only 10 percent of their liabilities. (Id. & Ex. G, at 1.) Tether’s cash

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reserves far exceed that, and the company has never lacked the funds to process a redemption.

(Id. ¶ 34.)

The Attorney General’s Investigation and Respondents’ Extensive Cooperation

In November 2018, Bitfinex and Tether learned that the Attorney General was

conducting an investigation, and counsel for the companies proactively reached out to the

Attorney General’s office to offer their cooperation. (April 30, 2019 Affirmation of Jason

Weinstein (“Weinstein Aff.”) ¶ 5.) Contrary to the highly misleading portrayal in the Attorney

General’s ex parte application, Bitfinex and Tether have been fully cooperative since that time.

(Id. ¶¶ 5-48.) The companies’ cooperation includes making 12 separate document productions,

comprising over 19,000 pages of material. (Id.) On top of that, Bitfinex and Tether provided 26

pages of written responses to the Attorney General’s information requests. (Id. ¶¶ 43, 47.)

The Attorney General’s ex parte application suggests that Bitfinex and Tether were not

forthcoming about the line-of-credit transaction, but that is false. As shown by correspondence,

the Attorney General chose to omit from the ex parte application, counsel for Bitfinex and Tether

proactively and voluntarily disclosed the existence of the contemplated loan transaction, and then

promptly produced the deal documents after it happened. (See id. ¶ 4 & Ex. 12, at 3.)

The Attorney General’s Ex Parte Application

Without any prior warning or notice to Bitfinex and Tether, the Attorney General on

April 24, 2019 filed an application in this matter under N.Y. Gen. Bus L. § 354 to require

Bitfinex and Tether to produce additional information by this Friday, May 3, 2019, and for a

preliminary injunction. The same day, Justice Debra James signed the Attorney General’s

proposed order without any substantive alteration. (Weinstein Aff. Ex. 1.) The April 24, 2019

Order requires Bitfinex and Tether to appear at a hearing on Friday, May 3, 2019, and to produce

sixteen broad categories of information. (Id. at 2-4.) The Order also indefinitely enjoins (among

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other things): “Further action by Bitfinex or Tether to access, loan, extend credit, encumber,

pledge, or make any other claim, of any variety or description, on the U.S. dollar reserves held

by Tether.” (Id. at 4 (item (i)).) The injunction also prohibits certain “distribution[s] or

dividend[s],” and requires Bitfinex and Tether to preserve documents. (Id. at 4-5 (items (ii) and

(iii)).)

The Attorney General immediately issued a press release to boast of the Order.

(Weinsten Aff. Ex. 16.) The Order was widely covered in the press, including an article in the

Wall Street Journal, which sourced some of its information to “people close to the attorney

general’s investigation.” (Hoegner Aff. ¶ 35 & Ex. H, at 3.) Clearly, the Attorney General was

aiming to make a public “splash” without giving Bitfinex or Tether a chance to defend

themselves.

Despite the inflammatory nature of the application, and the many false or misleading

statements, tether continued to trade at just below par thereafter. (Hoegner Aff. ¶ 35 & Ex. F, at

2 (showing closing price of tether at $0.997 on April 25, 2019).) The volume of trading was far

higher than normal, which shows that tether holders who thought the news was grounds to sell

had a highly-liquid market in which to do so. (Id. ¶ 35.) Since the news, tether has processed

redemptions with no interruption. (Id.)

DISCUSSION

I. THE COURT HAS BROAD DISCRETION TO IMMEDIATELY STAY AND

ULTIMATELY VACATE OR MODIFY THE APRIL 24, 2019 ORDER

The Court is authorized “at any time” to “vacate or modify” a preliminary injunction, see

CPLR 6314, and whether to do so is left to the Court’s “sound discretion.” Rosemont Enters. v.

Irving, 49 A.D.2d 445, 448 (1st Dep’t 1975). Bitfinex and Tether bring this motion via an order

to show cause instead of the ordinary notice procedures, which litigants may do “in a proper

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case.” CPLR 2214 (d). Whether to sign the order to show cause is “entirely in the judge’s

discretion.” Id. Practice Commentaries § C2214:25.

As discussed below, an order to show cause is necessary here because of the immediate

harm wrought by the April 24, 2019 Order’s legally-invalid terms. Bitfinex and Tether cannot

wait the weeks or months typically necessary for a motion to be briefed and decided.

Given the urgency, the proposed order to show cause requests that the Court immediately

stay the previously-issued order pending a hearing at the Court’s earliest convenience. A “stay is

an appropriate remedy, and can be included in an order to show cause,” under either CPLR 2201,

which authorizes a stay “in a proper case,” or CPLR 5015, which authorizes relief from an order

“upon such terms as may be just.” See CPLR 2214, Practice Commentaries § C2214:26.

Because a request for a stay “affects activity within the litigation” only — as opposed to a

temporary restraining order, which “affects the adverse party’s out-of-court conduct” — stays

may be issued immediately without the proponent having to show irreparable injury or otherwise

meeting the traditional standards for interim relief under Article 63. Id.

II. THE APRIL 24, 2019 ORDER SHOULD BE VACATED OR MODIFIED

A. The Indefinite Ex Parte Order Was Issued

Without Basic Due Process Protections

The April 24, 2019 Order should be vacated at the outset because of the improper means

by which it was obtained. Under basic due process principles, the government cannot deprive a

person of property without notice and an opportunity to be heard, “except for extraordinary

situations where some valid governmental interest is at stake that justifies postponing the hearing

until after the event.” Fuentes v. Shevin, 407 U.S. 67, 82 (1972); see also Matter of Fosmire v.

Nicoleau, 144 A.D.2d 8, 12 (2d Dep’t 1998) (recognizing “due process implications caused by

proceeding without notice”). An ex parte temporary restraining order can qualify as the type of

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“extraordinary” situation authorizing action before notice, but the affected party must always be

given a “prompt judicial or administrative hearing that would definitely determine the issues.”

Barry v. Barchi, 443 U.S. 55, 64 (1979).

These strictures are reflected in the CPLR. After a temporary restraining order is issued,

the court must “set the hearing for the preliminary injunction at the earliest possible time.” CPLR

6313. That is because “[t]he purpose of a temporary restraining order is to preserve an existing

situation in status quo until the court has an opportunity to pass upon the merits of the demand

for a preliminary injunction.” Pan Am. World Airways, Inc. v. Flight Engineers’ Int’l Ass’n, 306

F.2d 840, 842-43 (2d Cir. 1962).

While the April 24, 2019 Order in this case is nominally a preliminary injunction, it is the

equivalent of an ex parte temporary restraining order — except one without any contemplated

expiration date or hearing. That is flatly inconsistent with due process.

Any reading of Gen. Bus. L. § 354 that would authorize an open-ended ex parte

injunction should be rejected. The court in Dairymen, Inc. v. Hardin, 369 F. Supp. 1102 (E.D.

Tenn. 1974), faced a similar situation, and appropriately recognized that due process must

control. There, a Tennessee statute relating to milk cooperatives appeared to “mandate ex parte

relief” and bar “hearing upon the plaintiff's application for a preliminary injunction,” but the

court concluded that a “literal reading of the statute” would “raise due process issues.” Id. at

1104. Accordingly, the court read the statute as “not modifying requirements of notice, hearing

or the usual equitable principles applicable to the granting of preliminary injunctive relief.” Id.

The same reasoning applies here. The April 24, 2019 Order purports to impose an

indefinite injunction without the traditional right to be heard. For that reason alone, it should be

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vacated, and any further application from the Attorney General should be required to comply

with the standard procedures for preliminary injunctive relief.

B. The Attorney General’s Ex Parte Application Should Have

Been Governed by the Traditional Standards for a Preliminary Injunction

The Attorney General’s initial ex parte application was brought under a Gen. Bus. L.

§ 354, which is part of the Martin Act. By statute, the CPLR governs in Martin Act matters:

“The provisions of the civil practice law and rules shall apply to all actions brought under this

article except as herein otherwise provided.” Gen. Bus. L. § 357.

Recognizing this point, the Court of Appeals has held that a “preliminary injunction

under the Martin Act, as under CPLR article 63, should be granted only upon a showing of a

likelihood of success on the merits, irreparable injury if the relief is not granted, and a balancing

of the equities.” State v. Fine, 72 N.Y.2d 967, 968-69 (1988). The Attorney General did not cite

Fine, nor attempt to meet its standards.

Instead, the Attorney General relies upon a nonbinding trial court decision, Schneiderman

v. Eichner, No. 451536/2014, 2016 WL 3057994, at *1 (N.Y. Sup Ct. May 26, 2016), which

concluded that the language in Gen. Bus. L. § 354, authorizing a preliminary injunction where

“proper and expedient,” supplanted the traditional Article 63 standards.

Respectfully, Eichner was incorrectly decided and should not be followed. The more

natural reading of the “proper and expedient” clause is that it supplements (not replaces) the

ordinary standards. How would a court determine the “prop[riety]” of a preliminary injunction,

except by reference to the traditional standards for one?

There are other contexts where the term “proper” refers to existing standards. For

example, the CPLR provision authorizing a venue change for cases not brought in the “proper

county” is understood to mean that the trial court must determine whether the original venue

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choice complied with the venue “rules specified in [the] CPLR” or “some other venue-regulating

statute.” CPLR 510, Practice Commentaries C501:1. It does not mean the trial court can jettison

the existing venue rules and send cases to any county that it considers to be “proper.”

The court in Eichner was also wrong in failing to apply Gen. Bus. L. § 357, which, as

discussed, incorporates the CPLR into Martin Act matters. The court in Eichner seized on the

fact that Gen. Bus. L. § 357 refers to incorporating the CPLR for purposes of an “action,” which

the court interpreted to mean only a Martin Act lawsuit under Gen. Bus. L. § 353 (the procedural

posture in Fine) not to a pre-complaint special proceeding under Gen. Bus. L. § 354 (the

procedural posture in that case and here). 2016 WL 3057994, at *13.

This hyper-technical reading is wrong. By statute, “[t]he word ‘action’ includes a special

proceeding,” CPLR 105(b), and, except where otherwise specified, the “procedure in special

proceedings shall be the same as in actions.” CPLR 103(b). “This enables procedures that are

applicable in terms to an ‘action’ to govern in special proceedings . . . without having constantly

to repeat the words ‘special proceeding.’” David D. Siegel, New York Practice § 4 (6th ed.

2018).

Even apart from the plain statutory language, there is no good reason to have one

preliminary injunctions standard for a pre-complaint proceeding under Gen. Bus. L. § 354, and

another after the complaint is filed under Gen. Bus. L. § 353. This is especially true because an

injunctions issued at the pre-complaint phase will persist through the action. Attorney General v.

Katz, 55 N.Y.2d 1015, 1017 (1982). Why would the Legislature give the Attorney General

incentive to always seek the drastic remedy of an injunction at an earlier, less developed stage of

a case? This would make no sense.

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The Court should follow the Court of Appeals decision in Fine and apply the traditional

preliminary injunction standards.

C. The April 24, 2019 Order Cannot Be Justified

Under the Traditional Preliminary Injunction Standard

Under the traditional standards for a preliminary injunction, it is clear that there was no

basis for the April 24, 2019 Order.

1. The Attorney General Will Not Succeed on the Merits

a. The Martin Act

The Martin Act was enacted in 1921 as “New York’s version of the blue sky laws which,

in various forms, have been enacted by every State in the country.” CPC Int’l Inc. v McKesson

Corp., 70 N.Y.2d 268, 276 (1987). The name “blue sky” refers to the aim of these laws to stop

swindlers that would “sell shares of the blue sky to unsuspecting purchasers.” Anwar v. Fairfield

Greenwich Ltd., 728 F. Supp. 2d 354, 359 (S.D.N.Y. 2010) (citation omitted).

The Martin Act does not attempt to regulate the particular features of securities or the

business of the issuers but instead reflects a “disclosure approach.” Kerusa Co. LLC v W10Z/515

Real Estate Ltd. Partnership, 879 N.Y.S.2d 17, 21 (2009). The theory is that, if the risks of an

investment are disclosed, investors can engage in “self-protection” by deciding for themselves

whether to buy or sell. Id.

As is pertinent here, the Martin Act prohibits “fraud, deception, [and] concealment . . .

where engaged in to induce or promote the issuance, distribution, exchange, sale, negotiation or

purchase within or from this state of any securities or commodities.” N.Y. Gen. Bus. L.

§ 352-c(1), and authorizes the Attorney General to bring a civil action for injunctive relief and

restitution. Gen. Bus. L. § 353(1), (3).

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“Although the Martin Act was enacted in 1921, its present form generally tracks the

Federal securities acts of 1933 and 1934,” and thus courts should “look[] to Federal court

decisions construing those statutes when interpreting” the Martin Act. People v. Landes, 84

N.Y.2d 655, 660 (1994).1

b. The Attorney General Has Not Shown that Tether Is a

Security or Commodity Covered by the Martin Act

The New York Attorney General’s contemplated Martin Act action is unlikely to succeed

based on a threshold fact that the tethers that were allegedly sold via fraud (i.e., the allegedly

undisclosed transaction that depleted the tether reserves) fall entirely outside the statute’s reach.

As is relevant here, the Martin Act covers only transactions in “securities or

commodities, as defined in section three hundred fifty-two of this article,” N.Y. Gen. Bus. L.

§ 352-c(1), which, in turn, defines:

 securities as “any stocks, bonds, notes, evidences of interest or indebtedness or

other securities”; and

 commodities as “any commodity dealt in on any exchange within the United

States of America or the delivery of which is contemplated by transfer of
negotiable documents of title”

N.Y. Gen. Bus. L. § 352(1). The Attorney General’s papers do not attempt to explain how tether

meets these definitions, except to state in passing that tethers “have characteristics of securities

and commodities.” (April 25, 2019 Affirmation of Brian M. Whitehurst (“Whitehurst Aff.”)

(ECF No. 1) ¶ 28.) Even if true, that is not the standard.

For purposes of the “securities” definition, the Court of Appeals has adopted the “so-

1
Bitfinex and Tether dispute that this Court has jurisdiction over them for any Martin Act claims
because, among other reasons, they do not operate in the United States, and because both
companies bar New York residents from doing business on their platforms. The present
application is focused on ameliorating the immediate harm wrought by the Attorney General’s
improper ex parte order, but should not be understood as a concession as to jurisdiction.

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called ‘Howey test’” from federal securities case law, under which a transaction is a security if it

involves “an investment of money in a common enterprise with profits to come solely from the

efforts of others.” All Seasons Resorts v. Abrams, 68 N.Y.2d 81, 92 (1986) (citation omitted).

Tethers do not meet this definition because they are “stablecoins” used to perform the

administrative function of facilitating transactions in other virtual currency. (Hoegner Aff.

¶ 9.) There is no expected “profit” from stablecoins; their reason to exist is to be redeemable at

exactly par — no more — so that they can be used as a medium of exchange. (Id.)

Courts have found that instruments that function in an analogous fashion — as a medium

of exchange between markets — are not securities under the Martin Act. For example, in

Lehman Bros. Comm’l Corp. v. Minmetals Int’l Non-Ferrous Metals Trading Co., 179 F. Supp.

2d 159, 164 (S.D.N.Y. 2001), the court found that foreign currency exchange transactions and

interest rate swaps did not meet the definition. In both cases, the value is based on “market

forces” not on the issuer’s “entrepreneurial efforts.” Id. (citation omitted).

Nor has the Attorney General shown that tether the type of “commodity” covered by the

Martin Act. The statute covers only those commodities that are “dealt in on any exchange within

the United States of America or the delivery of which is contemplated by transfer of negotiable

documents of title.” N.Y. Gen. Bus. L. § 352(1). The Attorney General has not attempted to

show how these criteria are met.

c. Tether Disclosed that Its Reserves Included Affiliate Loans

Pervading the Attorney General’s motion papers is the mistaken premise that the Martin

Act’s antifraud language prohibits the allegedly “conflicted” line-of-credit transaction between

Bitfinex and Tether. For example, the Attorney General’s brief complains that “investors remain

indefinitely exposed to ongoing and highly conflicted activity that has every indication of fraud.”

(NYAG Br. 21.) As an initial matter, the Attorney General is confused because there are no
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“investors” here—a point made 21 times throughout the Attorney General’s memorandum of

law. There are only customers at issue. But further, the Martin Act does not purport to regulate

corporate governance or conflicts of interest; as discussed, the Act takes a “disclosure approach,”

Kerusa, 879 N.Y.S.2d at 21. Under that approach, a disclosed conflict is not fraudulent.

For example, in In re AIG Advisor Group Sec. Litig., 309 F. App’x 495, 496 (2d Cir.

2009), investors alleged that financial advisors had a “conflict of interest based on their receipt of

‘secret payments’” for having promoted certain securities, but the Second Circuit dismissed

federal securities claims because the company website “disclosed the existence of the very

‘conflict of interest’” supposedly concealed. Id. at 496. (As discussed, the federal cases are

instructive to interpreting the Martin Act. See Landes, 84 N.Y.2d at 660.) Similarly, in Wilson

v. Merrill Lynch & Co., Inc., 671 F.3d 120 (2d Cir. 2011), the Second Circuit rejected federal

securities claims challenging Merrill Lynch’s practice of bidding in its own auctions for auction-

rate securities — allegedly to create the false impression of demand — because “Merrill

disclosed that it would ‘routinely’ bid on its own account.” Id. at 135.

In both AIG and Wilson, the federal antifraud laws did not purport to address whether the

underlying, allegedly “conflicted” activity was lawful. The question was whether the activity

was disclosed, so that counterparties or investors could make informed decisions.

This same basic analysis applies to the Martin Act, and is exactly why there is no fraud in

this case. Tether changed its website in February to make clear that tethers were backed by

reserves that would include “loans” to “affiliated entities.” (Hoegner Aff. ¶ 31 & Ex. B, at 6

(Item 1.1.32); Ex. C, at 2 (Item 7).) This change was widely covered in the industry press. (Id.

¶ 32 & Exs. D, E.) Anyone holding tether was thus on notice of the risks and could decide for

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themselves whether to sell. And they have had every ability to do so; the line-of-credit

transaction has not impeded redemption at all. (Id. ¶ 33.)2

d. The Attorney General Is Unlikely to

Obtain Any Relief on the Merits

A preliminary injunction is also inappropriate here because the Attorney General is

unlikely to obtain relief on any of its Martin Act claims. The statute authorizes injunctive relief

and restitution, Gen. Bus. L. § 353(1), (3), but neither could possibly be appropriate in this case.

First, there is no evidence of any harm that would merit restitution, because the Attorney

General has not identified any victim that has suffered any loss. There is not one customer

identified that has been unable to transact business on Bitfinex based on the allegations in the

petition, nor any customer identified that has been unable to redeem his or her tether. As

discussed, Tether has been able to honor redemptions without interruption, and has ample liquid

reserves to continue doing so. (Hoegner Aff. ¶¶ 33-35.)

Second, the Attorney General will not be able to obtain permanent injunctive relief

because, again, the information supposedly concealed from “investors” — that Tether’s reserves

were deployed in part towards affiliated transactions — was disclosed prominently on Tether’s

website over two months ago and even discussed prominently in the press. Further details are

now fully in the public domain, thanks to this very proceeding.

The Martin Act authorizes the Attorney General to file suit to enjoin anyone

“participating in or about to participate in [the] fraudulent practices” that form the basis for a

claim “from continuing such fraudulent practices or engaging therein or doing any act or acts in

2
It also bears emphasizing that, contrary to the portrayal in the Attorney General’s brief, the
supposedly “conflicted” transaction was undertaken with safeguards to ensure that the result
reflected an arm’s length deal. (Hoegner Aff. ¶ 25.)

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furtherance thereof.” N.Y. Gen. Bus. L. § 353 (emphasis added). The phrasing in the present

tense means that, “[w]here the defendant is not engaged in an ongoing violation,” there must be a

“reasonable likelihood that the wrong will be repeated” to justify injunctive relief. SEC v. Am.

Bd. of Trade, Inc., 751 F.2d 529, 537 (2d Cir. 1984) (construing similar language in federal

securities statutes). That necessarily means that “[i]njunctive relief should not be granted if the

harmful conduct sought to be enjoined has been discontinued.” Datil v. Watson, 97 Civ. 4970,

1997 WL 715680, at *1 (S.D.N.Y. Nov. 13, 1997).

Here, as discussed, the alleged wrongdoing within the purview of the Martin Act is not

the line-of-credit transaction itself, but the alleged nondisclosure of that information. While

Bitfinex and Tether do not believe they did anything wrong at any point in time, any failures to

timely disclose information to customers or to holders of tether was cured when Tether updated

its website over two months ago — long before this proceeding was filed. The ongoing

transactions via Bitfinex and Tether are not in any sense fraudulent, nor is the line-of-credit

transaction. Without any ongoing fraudulent activity, there is little likelihood that the Attorney

General’s contemplated enforcement action will succeed in obtaining a permanent injunction

after trial. For these reasons, the preliminary injunction was improper and should be vacated.

2. The Attorney General Has Not Shown Any Irreparable Harm

The Attorney General has not shown any harm whatsoever, let alone harm that would be

irreparable. The Attorney General’s overarching concern appears to be the alleged depletion of

Tether’s reserves, but, as discussed, Tether has cash and cash equivalents (i.e., short-term

securities) on hand representing approximately 74 percent of the outstanding tethers, and other

assets of value that more than cover the outstanding amount. (Hoegner Aff. ¶¶ 33-34.) This sort

of “fractional reserving” is how commercial banks operate (id. ¶ 34), yet no one would contend

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that a commercial bank’s inability to cash out a hypothetical simultaneous request from 100% of

its customers for all their money is a fraud on anyone.

The Attorney General’s suggestion that redemptions will become a problem is not based

on evidence; it is rank speculation. And even if the Attorney General could show that customers

are “somewhat less secure,” that would hardly “constitute an irreparable injury so as to require

the drastic remedy of such an injunction.” Firemen’s Ins. Co. of Newark, New Jersey v. Keating,

753 F. Supp. 1146, 1154 (S.D.N.Y. 1990).

3. The Balance of Equities Favors Bitfinex and Tether

The balance of equites strongly factors Bitfinex and Tether, because the Attorney

General’s preliminary injunction was obtained via a misleading application, and serves no

purpose except to generate headlines. On the other side of the ledger, the injunction is highly

disruptive to Bitfinex’s business, and will only harm the very customers the Attorney General

claims to be interested in protecting. (Hoegner Aff. ¶ 40.)

D. A Preliminary Injunction Is Not “Proper and Expedient”

Even if the Court declines to review the April 24, 2019 Order under the traditional

standards, the injunction remains inappropriate under the “proper and expedient” standard

advocated by the Attorney General. There is scant case law on what exactly would make a

preliminary injunction “proper and expedient,” or why the standard would vary from the

established one in ordinary cases. But regardless of how the standard is interpreted, preliminary

injunctions are “‘drastic’ remedies,” see Uniformed Firefighters Ass’n v. New York, 79 N.Y.2d

236, 241 (1992) (citation omitted), and reserved “extraordinary” circumstances, Margolies v.

Encounter, 42 N.Y.2d 475, 479 (1977). The Court should not allow the one here to stand

because, as discussed, there is little merit to the Attorney General’s claims, and no useful

purpose to be served by the injunction.

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III. THE APRIL 24, 2019 ORDER SHOULD BE IMMEDIATELY STAYED

PENDING A DECISION ON THIS APPLICATION

The Court should sign the accompanying, proposed Order to Show Cause immediately

staying the April 24, 2019 Order because, as demonstrated above, the April 24, 2019 Order never

should have been issued, and is highly disruptive to Bitfinex’s business. Further, it demands a

wide swath of documents be produced by Friday, which is simply not possible. (Weinstein Aff.

¶ 50.) If the Attorney General’s office believes an injunction is appropriate, it should marshal

the appropriate proof at a contested hearing, as contemplated by the proposed Order to Show

Cause. At that point, the Court can decide on a full record whether interim relief is appropriate.

A hearing is normally required before preliminary injunctive relief may be issued, and the

Attorney General has failed to explain what emergency or other good reason merits a deviation

from the normal procedures. Bitfinex and Tether would welcome a scheduled hearing at the

Court’s earliest opportunity.

CONCLUSION

For the stated reasons, the Court should vacate or modify the April 24, 2019 Ex Parte

Order in this proceeding on the term described above.

Dated: New York, New York Respectfully submitted,

April 30, 2019

STEPTOE & JOHNSON LLP MORGAN, LEWIS & BOCKIUS LLP

By: /s/ Jason Weinstein By: /s/ David I. Miller

Jason Weinstein David I. Miller
Charles Michael Zoe Phillips
1114 Avenue of the Americas 101 Park Avenue
New York, New York 10036 New York, New York 10178
(212) 506-3900 (212) 309-6000
[email protected] [email protected]
[email protected] [email protected]

Counsel for Respondents

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RULE 17 CERTIFICATION

I am the attorney who is filing this document. I hereby certify that this document,

exclusive of the caption, table of contents, table of authorities, and signature block contains

6,990 words as counted by the word-processing system used to prepare the document.

/s/ Zoe Phillips

Zoe Phillips

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