morgan towns steptoe - judiciary of new york

Morgan towns steptoe

May 13, 2019

By E-Filing

Hon. Joel M. Cohen

Supreme Court, New York County

60 Centre Street, Room 570

New York, New York 10007

Re: In re Letitia James v. iFinex Inc., et al., Index No.: 450545/2019 (N.Y. Sup. Ct.)

Proposed Order on Motion to Vacate or Modify (Motion Seq. 002)

Dear Justice Cohen:

We write, as the Court directed during argument on May 6, 2019, on behalf of the

Respcñdcats iFinex Inc., BFXNA Inc., and BFXWW Inc. (collectively, "Bitfinex"), and Tether

Holdings Limited, Tether Operations Limited, Tether Limited and Tether International Limited

(collectively "Tether") to provide the Court with our Proposed Order, attached as Exhibit A, to

resolve theRespondents'

Motion to Vacate and/or Modify the April 24, 2019 Ex Parte Order.

We will also email a Word version of the Proposed Order for the Court's convenience.

We have discussed our Proposed Order with the Office of Attorney General ("OAG"),

but have been unable to reach agreement (except as noted below).

Below, we set forth why the Court should enterRespondents'

Proposed Order, and

should reject the terms that we understand OAG will propose. The discussion focuses on the

four components of the Proposed Order: (i) Related-Party Transactions, (ii) Distributions and

Dividends, (iii) Document Preservation, and (iv) Duration and Renewal of the Order.

We note, however, that we make this submission without waiving our arg=ents that the

Motion to Vacate the April 24, 2019 Ex Parte Order should be granted in its entirety, including

that there is no Martin Act jurisdiction in this proecediñg. This reservation of rights is also

consistent with the Court's statement during the May 6, 2019 argument that this submissian

"would be withoutprejudice."

(Transcript of May 6, 2019 proceedings ("Tr.") at 61.)

Related-Party Transactions

As the Court will recall, the focus of the OAG's preliminary iñjüñction was on the line-

of-credit transaction between Tether and Bitfinex that OAG believed to be"conflicted,"

and not

on thecompanies' operatianc more generally. The OAG made this clear in its initial brief,

arguing that "the conflicted and undisclosed transactions between Bitfinex and Tether, the details

of which contimie to be obscure, require immediate intervention by this Court . . .."

(Doc. No.

4, at 4.) No other conduct was alleged to be improper or to have vicated the Martin Act.

Hon. Joel M. Cohen Steptoe

May 13, 2019

Morg a n Lewg s

OAG's brief also stated plainly that "OAG does not seek to interfere with the orderly operation

of BitEnex or Tether's legitimate businesses . . .."

(Id. at 20.)

While we maintain that the line-of-credit transaction was lawful and proper, we are

miñdfhl that the Court stated on May 6 that it was inclined to enjoin further draws on the credit

line, at least for a limited period of time. We are also mindnd of the Court's admonition that the

injunction lañgnage not be so narrow as to allow Respondents to effectively replicate the

substance of the line-of-credit transaction in another form.

In light of those aims, the attached proposed Order would temporarily enjoin the

following:

(i) Further action by Tether to make loans or engage in similar

transactions that would result in Bitfinex or other afñliated parties

having claims on the U.S. dollar reserves being held by Tether

(such as the line-of-credit transaction that was the subject of the

Petition); without limiting the foregoing, for the avoidance of

doubt, this Order shall not preclude other activities in the ordinary

course of business;

This language is intcaded to cover both the specific line-of-credit transaction that was the

subject of OAG's petition, as well as anything"similar"

involving affiliates (i.e., anything that

would raise the OAG's stated concern about a conflict of interest).

At the same time, the language is intended to make clear that Tether can otherwise

operate its business as usual. Tether's business model depends on it making investments and

asset purchases with the proceeds it derives from selling tethers. If it simply held the proceeds in

cash, the company would not earn the money required to fund its operations.

The counterproposal from OAG is highly objectionable. OAG proposes to enjoin:

(i) Further action to loan, extend credit, or otherwise transfer the

U.S. dollar reserves held by Tether to, or for the benefit of,

Bitfinex or any affiliated parties. This injunction does not restrain

Tether's use of its U.S. dollar reserves to fulfill bona fide

redemption requests by holders of tethers that are not amliated

with Respondents, nor does it restrain placement of the U.S. dollar

reserves held by Tether in interest-bearing or other cash or cash-

equivalent accounts.

First, there is no basis to cut off the ability of tether holders who happen to be amliated

with Respondents to redeem their tether. This restriction has no nexus whatsoever to the line-of-

credit transaction or anything in OAG's application.


May 13, 2019

Morg a n Lewg s

Second, this language could be misread to suggest that Tether may only invest "cash or

cash-equivalentaccounts,"

which would be a gross overreach, again with no nexus to OAG's

original application. OAG does not sit as a regnletor to approve or disapprove how Tether

deplays its funds for investment; that is appropriately the job of Tether's Chief Investment

Officer. In fact, as the Court may recall, OAG's counsel seemed to agree with this point at last

week's me....ent: "I'll say at the outset, we're notregulators."

(Tr. at 44.) Yet with OAG's

proposal, that is exactly OAG is trying to be.

Distributions and Dividends

OAG's original petition sought and obtained preliri=ary injunctive relief against insiders

making "dividends anddistributions." We have maintained that original language, but added an

"avoidance-of-doubt"clause, to ensure that this lañgüãge is not misread to prohibit ordinary

course payments. Thus, this subparagraph would enjoin the Respondents from:

(ii) Making any distribution or dividend to any principal,

executive, employee, agent, investor, or associate of Bitfinex and

Tether from funds that have been loaned, extended, pledged, or

otherwise taken from the U.S. dollar reserves held by Tether; and,

for the avoidance of doubt, the foregoing shall not preclude

payments in the ordinary course of business, indnding for payroll

or payments to vendors, consultants, and/or contractors;

As we understand it, OAG objects to this language and seeks to permit payments only to

the extent they are made "from non-reservefunds."

This additional requirement is not

appropriate. While Tether is a profitable company that generally does not spend more than it

earns, there is not a separate account earmarked"non-reserve"

from which ordinary course

expenses are paid. Money is füñgible. Accordingly, determining whether payments are from

reserves or not is fraught with ambiguity and would be a recipe for future conflict with OAG.

More fundamentally, while Tether does not anticipate that it will suddenly become

unprofitable, OAG's language would potentially require the company to cut off salary and other

ordinary course payments in any given period if, for whatever reason, there was insufficient

profit (again, with all the ambiguity that entails). It is simply not the OAG's purview to

micromanage Tether's business in this way.

Document Preservation

OAG's original petition sought and obtained preliminary injunctive relief ensuring

appropriate document preservation. We have mai±shed that language almost verbatim, except

for correcting one typographical error, and deleting a clause that would seemi-gly require the

Respondents to preserve everything relating to the "Attorney Gcñcral'sinvestigation." We

deleted that clause because the full scope of the investigation is unknown to the Respandents


May 13, 2019

Morg a n Lewg s

The surrounding language, requiring preservation of material relating to the subpoenas issued

and the documents sought by this petition, should be more than sufficient.

The proposed language would thus enjoin the Respondents from:

(iii) Directly or indirectly tampering with, mutilating, altering,

erasing, removing, destroying or otherwise altering or disposing of

any and all books, records, documents, files, correspondence,

assets, accounts, personnel files, cassette tapes or other recordings

of any type, computers, computer or other disks and hard drives,

other types of tapes and document recordings, computer records or

videotapes of any type, however created, evidences of electronic

transmissions or documents, produced or stored, or other tangible

items, wherever located, including but not limited to places of

business and home addresses, residences and places of storage,

relating to any relevant or potentially relevant documents,

commimications, or information called for by the subpoenas dated

November 27, 2018, the letter of February 26, 2018, or in

connection with this Order, including but not limited to personal

com=mications of Bitfinex and Tether principals, employees,

agents, contractors, investors, or associates on encrypted devices or

from"ephemeral"

or other self-deleting applications.

As we understand it, OAG has no objection to this language.

Duration and Renewal of Order

UnderRespondents'

Proposed Order, the preliminary injunctive relief would expire in 45

days, subject to OAG's right to move for it to be extended. OAG is proposing an entirely

different mechanism (discussed below), but we believe our proposal is most appropriate and

consistent with the Court's views expressed during the May 6, 2019 argument.

The 45-day time limit is based on the Court's statement during the May 6 argument that

the preliminary injunc+4ve relief needed to be limited in duration. While we disagree that any

injunction is appropriate, we agree that there are good reasons to keep any injunction to a limited

duration.

First, OAG's showing on the merits was concededly less robust than would arise in a

prdiminary injunction issued in a full-blown lawsuit. In arguing for a more relaxed legal

standard, OAG told the Court that it should not be required to "prove that it is likely to prevail on

the merits of a not-yet-existinglawsuit."

(Doc. 56, at 16.) OAG added that it was not "clear

how the OAG would establish likelihood of success on merits its claims, since it has not yet


May 13, 2019

Morg a n Lewg s

articulatedclaims."

(Id. at 16.) OAG should not be given the benefit of an indefinite i-jüñc6en,

based on inchnate claims that it concededly cannot articulate.

At the same time, Gen. Bus. L. § 354 proceedings like this one are authorized only where

"the attorney general has determined to commane anaction"

under the Martin Act already. Gen.

Bus. L. § 354. OAG recognized this requirement, and submitted a sworn affirmation stating that

"OAG has determined to commence an action against Respoñdcñts pursuant to the MartinAct."

(Doc. 1 [Whitehurst Aff.] ¶ 4.) If OAG wants an injunction of a longer duration, it should file

the Martin Act lawsuit it has already"determined"

to file, and establish that it is likely to satisfy

the specific al mants of the specific claims alleged (whatever those may be). OAG should not be

given weeks or months on end to do so.

Second, in the unique factual posture of this case, the justification for any injunction

dissipates over time, as Tether customers have even more opportunity to take into account the

disclosed information and act accordingly.

The core alleged wrongdoing here is that Tether customers were not told of an allegedly"conflicted"

transaction that depleted the assets backing their tethers and that was intended "to

plug the (undisclosed) hole of several hundred million dollars in the finances of the Bitfinex

tradingplatform."

(Doc. 4, at 30.) Respondents maintain that their disclosures were sufficient at

all times, and that in any event, OAG's press release and the resulting press coverage of this very

matter put Tether's customers on notice as of April 24 of the information allegedly concealed.

Notably, none of the tether holders on whose behalf OAG is purportedly acting- the

presumed"victims" - have suffered any harm whatsoever. They have been able to redeem their

tethers unabated. A tether is not a like a share of Apple stock bought in anticipation of it

appreciating; it is a"stablecoin"

that, when purchased from Tether, is intended to be redeemable

at par - not more, no less. Tether customers taking issue with the line-of-credit trusaction (or

the concept of affiliated transactions more generally) have had ample time to radaam with the

facts widely known. Anyone redcc----ing from Tether has received exactly what was promised

from the outset: tethers exchanged for dollars on a one-to-one basis. With each passing day, this

dynamic becomes even more pronounced, so that anyone holding tethers 45 days hence would be

doing so with eyes wide open and could not possibly complain about having been"defrauded"

about anything.

Respondents'proposal puts the onus on OAG to extend the injunction because that is

consistent with the basic principle that a party seeking an iñjüñction has the burden to justify it.

E.g., Council of City of New York v. Giuliani, 248 A.D.2d 1, 4 (1st Dep't 1998). OAG's

proposal, as we understand it, would flip the burden to the Respondents, which is backwards.

Further, OAG's proposal would require Respondents to first show that "they have

substantially complied with the production of materials calledfor"

in the April 24, 2019 Ex Parte

Order before the injunction could be lifted. But there is no good reason to link the injunction to


May 13, 2019

Morg a n Lewg s

the document production, particularly since the docmet demands are so broad and go far

beyond the transaction that gave rise to the hjection. For example, OAG seeks (among its

sixteen requests): (i) "[a]ll documents evidencing all requests, order, or demands for U.S. dollar

withdrawals"from Bitfinex since January 2018, and (ii) "[a]ll documents evidencing each order

or request for purchase, issuance, or redemption of tethers since January 1, 2017 for U.S. Dollarwithdrawals."

(Doc. 35, at 3 (Items (viii) and (ix)).) As if that were not enough, OAG has

issued a "catchall"

request for "[a]ll other documents that may berequested"

by OAG. (Id. at 4

(Item (xvi)).) Given the breadth of the requests - and the OAG's unilateralability to demand

more - the OAG's proposal is a recipe for an opcñ-cñded injunction, or, at the very least,

guarantees future conflict with OAG.

To be sure, the Court noted during the May 6 argument that certain of the document

requests could be related to the injunction. To the extent OAG lacks specific information that it

believes would tend to bear on the propriety of extendig the injunction, then, under our

proposal, OAG may highlight that fact as a potential factor in weighing whether to extend the

injunction. But it simply goes too far to condition the lifting of the i-jsetion on the completion

of the highly-onerous, full document production (or even substantial completion), especially

where Respondents intend to argue that muldple requests are unreasonable or call for the

production of irrelevant material.

***

We thank the Court for considëngRespondents'

proposal. Given the breadth of the

existing langüãge under the April 24, 2019 Ex Parte Order, and its effect onRespondents'

daily

business operations we respectfully ask that the Court issue its modification of the April 24,

2019 Ex Parte Order, in the form the Court considers appropriate, as soon as practicable.

We can be availabic to discuss these matters by phone, or to appear before the Court, at

the Court's earliest convenience.

Respectfully,

Jason Weinstein

Charles Michael

STEPTOE & JOHNSON LLP

David I. Miller

Zoe Phillips

MORGAN, LEWIS & BOCKIUS LLP

Counsel for Respondents


May 13, 2019

Morg a n Lewg s

cc: John Castiglione, Office of the Attorney General

(by email to [email protected])

Johanna Skrzypczyk, Office of the Attorney Gcñcral

(by email to [email protected])

Brian Whitehurst, Office of the Attorney General

(by e-filing and by email to [email protected])

morgan towns steptoe - judiciary of new york

Documents