Court rules New York AG can resume investigation into entities behind Tether

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New York AG James

An Appellate Division of the New Your Supreme Court ruled that the State’s Attorney General Letitia James can continue her investigations into entities behind the cryptocurrency called Tether.

The ruling comes after Brock Pierce, a former child actor and a cryptocurrency venture capitalist who co-founded Tether, announced his long shot presidential bid.

Pierce recently told Bloomberg, “Tether is, I think, one of the most important innovations in currency, but it also seemed like one of the higher risk businesses.” He added that he is no longer involved with Tether since 2015.

New York AG concerned about possible fraud by entities behind Tether

In November 2018, AG James launched a fraud investigation into iFinex, Tether Holdings, and their affiliates due to her concern that the companies do not have enough liquidity to allow customers to redeem Tether at the represented value.

iFinex is the operator of the cryptocurrency trading platform while Tether Holdings is the issuer of Tether as a “stablecoin,” a type of cryptocurrency designed to minimize price volatility by backing it with a stable asset or currency such as the U.S. Dollar.

iFinex and Tether Holdings challenged AG’s investigation

Under New York’s Martin Act, the Attorney General has a broad authority to investigate companies that are possibly defrauding the public and to start a civil or criminal prosecution if appropriate.

AG James issued subpoenas to iFinex, Tether Holdings, and their affiliates to submit documents and information regarding their activities. The companies’ counsel accepted service of the subpoenas and produced some of the information and documents requested by the Attorney General.

In early 2019, AG James’ investigation revealed information regarding iFinex and Tether Holdings’ transaction that might be a conflict of interest. The Attorney General raised her concerns regarding the matter, but the respondents completed the deal.

AG James perceived the transaction as a sign that iFinex was experiencing a serious financial problem and Tether Holdings’ cash reserves supporting Tether would be squandered. She was also concerned that the respondents misled their customers regarding the matters.

Due to her concerns, the Attorney General sought an ex parte order from the New York Supreme Court requiring iFinex, Tether Holdings, and their affiliates to produce documents, testify under oath and to issue a preliminary injunction or stay that it sees proper and expedient pursuant to the General Business Law § 354.

On April 24, 2019, the Supreme Court issued an exparte order requiring the respondents to produce certain documents and prohibiting them from

  1. taking any further action to “make any claim . . . on the U.S. dollar reserves held by Tether” [Holdings];
  2. making any payments to any individual associated with respondents “from the U.S. dollar reserves held by Tether” [Holdings];
  3. altering or destroying any documents related to the investigation

On April 30, 2019, the respondents filed a motion to modify or vacate the Supreme Court’s exparte order. On May 16, 2019, the Supreme Court partly granted their motion by modifying the temporary restraining order but rejected their motion to vacate.

On May 21, 2019, filed an instant motion styled as a motion to dismiss using CPLR 3211[a][2]) lack of subject matter jurisdiction and CPLR 3211[a][8] lack of personal jurisdiction as arguments. The Supreme Court denied the motion on August 19, 2019. The respondent appealed the decision.

Court of Appeals’ opinion

On July 9, 2020, the Court of Appeals denied the respondents motion to dismiss, citing the facts that under the Martin Act, the high court “has no further role in the Attorney General’s investigation” once it an order responding to a GBL 354 application has been issued. The only exception is to “rule on a motion by either party to vacate or modify the order, as respondents made here.”

“All that remained was the Attorney General’s ongoing investigation, in which, by statute, the courts have no further role at this stage,” according to the Court of Appeals.

Additionally, the Appeals Court explained, “Here, petitioner is investigating, inter alia, whether respondents have committed fraud (as broadly defined in the Martin Act) ‘within or from’ New York (GBL 352) by making untrue claims about the cash reserves backing tether and their ability to honor customer withdrawal requests. She has sought documents and information from respondents going back to 2015, which is well within the applicable six-year statute of limitations (CPLR 213[9])…”

Furthermore, the Appeals Court expounded, “Accordingly, petitioner has demonstrated that respondents’ activities in New York were sufficiently related to the subjects of petitioner’s investigation to satisfy specific personal jurisdiction for the purposes of GBL 354 … Petitioner has made a sufficient showing of personal jurisdiction in the context of this Martin Act investigation for Supreme Court to have issued the ex parte order pursuant to GBL 354. The Martin Act authorizes the Attorney General to investigate securities or commodities fraud (as those terms are defined by the Act) ‘within or from’ New York (GBL 352). Petitioner may properly investigate a foreign entity if she ‘has a reasonable basis for believing that [it] has violated a New York statute.'”