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Bitfinex, Attorney General Legal Sparring Continues With New Court Filings

Bitfinex and the New York Attorney General’s (NYAG) legal sparring in relation to $850 million in missing funds escalated with another round of court filings this past weekend.
Law & justice - Bitfinex

Bitfinex and the New York Attorney General’s (NYAG) legal sparring in relation to $850 million in missing funds escalated with another round of court filings this past weekend.

The top exchange and New York’s principal legal advisor went back and forth with each other in two new letters submitted to the New York Supreme Court. Within the fresh filings, each a response to a previous filing by the other, the same ole song and dance.

Bitfinex continues to deny that it did anything wrong and opines that the NYAG has no legal basis to further probe its business practices or cut off its line of credit with Tether. The NYAG, on the other hand, thinks it’s made a foolproof argument for why those actions are necessary and is pushing its case forward — with some new evidence to give its actions added merit.

Meanwhile in the background, Bitfinex is planning an initial exchange offering (IEO) to recoup the $850 million in question.

“The Need to Maintain the Status Quo”

As with the first filing, the NYAG’s argument in its latest letter is pitched as an attempt to “protect the public.” If Bitfinex is permitted to continue to siphon funds from Tether through the $900 million line of credit it established to substitute the $850 million tied up in questionable payment processor Crypto Capital, Bitfinex and Tether users are at risk, the NYAG argues.

“If Bitfinex is permitted to continue to draw on the Tether reserves (having already drawn at least $750 million dollars), with no assurance of adequate security or ability to repay, there is significant possibility those additional reserves will be unrecoverable.”

In response to the NYAG’s filing, Manhattan Justice Debra James ordered Bitfinex to produce documents related to the NYAG’s investigation into Bitfinex, “including documents the OAG [Office of the Attorney General] had been seeking since November 2018.” In addition, the judge’s issued order prohibits “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.”

Bitfinex argues that this response serves a greater risk to Bitfinex and Tether users than the companies’ concomitant operations. Particularly, Bitfinex took qualm with the justice’s order to enjoin Bitfinex from drawing on Tether’s reserves. In its own court filing submitted last week, Bitfinex requested that the court throw out the NYAG’s order unless it is modified.

The NYAG dismisses Bitfinex’s concerns that the order interferes with Bitfinex’s operations, writing that the legal action has done nothing to obstruct deposits.

Further, the attorney general provides fresh evidence to justify a deeper probe, including reports that Reginald Fowler and Ravid Yosef, who were recently convicted of conducting unlawful money “shadow banking” for cryptocurrency exchanges, may be related to Crypto Capital and have a hand in the lost funds. Bitfinex in its own filing also mentions that it debited $675 million from Tether’s reserves last year to partly cover the $850 million loss, “a $50 million dollar descrpency” from the $625 million figure Bitfinex accounted for when it disclosed the deal to the NYAG during its investigative subpoena into the exchange.

This, along with the NYAG’s frustrated attempts to procure additional documents related to its investigation, “raises additional questions” that merit the case staying open, the attorney general’s latest letter argues.

“Importantly, the OAG has continued to ask for, but has not received, documents and information that would shed even some light on the ‘liquidity issues’ facing Bitfinex, the exposure of its clients, which would presumably help inform the OAG, and the Court, about the actual financial status of the company.”

“The Attorney General Will Not Succeed on the Merits”

Still, Bitfinex isn’t budging.

The exchange’s response to the NYAG’s response of its own response (are you keeping up?) again requests that the court “vacate or modify” the ex parte order. It rejects both the NYAG’s and Justice James’s belief that the order is “proper and expedient,” largely arguing that the NYAG has failed to substantiate why it or the Martin Act, which its order invokes, has any jurisdiction over Bitfinex and Tether.

“… the Attorney General does not even try to explain how tethers qualify as securities or commodities covered by the Martin Act … the Attorney General should not be afforded the drastic remedy of a preliminary injunction, or an order requiring the Respondents to address blunderbuss document demands, without establishing the basis for its authority to even regulate in this sphere,” Bitfinex’s legal counsel writes in the filing.

It continues to lambast the slew of historical cases that the NYAG uses to justify as its legal precedent as “false.”

Moreover, it denies the NYAG’s allegations that Bitfinex or Tether engaged in fraud when the exchange drew on the stablecoin’s reserves to ameliorate its losses (for its part, the attorney general is particularly concerned that this transaction was not made public). As such, the court order to shutter the $900 million line of revolving credit is “massive regulatory overreach” that has “no corresponding benefit,” the letter reads; on the contrary, Bitfinex believes this action will be “hugely disruptive because it freezes in place over $2 billion of the Tether’s reserves, prohibiting any investment of any kind into the indefinite future.”

The response does not address the NYAG’s concerns with Fowler and Yosef’s “shadow banking” scheme in relation to Crypto Capital and Bitfinex’s funds, nor does it rebut the claim that Bitfinex’s reportedly drawing $675 million from Tether contradicts the original $625 million figure that the exchange reported to the attorney general.

While all of this legal dust has been kicked up, reports have been rolling in that Bitfinex is planning a token offering. The company hopes to raise $1 billion from the IEO in hopes of covering the $850 million lost to Crypto Capital, and it plans to buy back and burn tokens from token holders on a monthly basis as compensation.

Bitfinex Official document about the LEO token

— Dong Zhao (@zhaodong1982) May 4, 2019