Bitfinex and its sister company, Tether, hit global headlines in the crypto community recently after the New York Attorney General filed for legal action against their parent firm, iFinex, Inc..
In what’s shaping up to be the blockbuster crypto scandal of the year, the crypto exchange and stablecoin operator has been requested to submit documents to the court in New York by May 3, ahead of the next stage of proceedings against them.
Now, a series of further twists has changed the complexion of the legal argument, with the company fighting robustly against the legal basis for the allegations while battling fresh allegations of links to murky bank accounts.
The action was brought over allegations about unsatisfactory money management at the company, namely the commingling of client funds between companies within the group.
The New York Attorney General chose to act after Bitfinex was alleged to have used Tether reserves to patch a substantial hole in its accounts after the firm lost $850 billion, in what was described by the Attorney General as “a cover up.”
Tether (USDT) is promoted as a stablecoin on the basis that it is backed 1:1 with USD. According to the Attorney General, Bitfinex cannot dip into those reserves, even in exceptional circumstances, which would be a breach of the principles frequently stated to investors in the cryptocurrency.
But IFinex hit back with a 30-page memorandum of law, petitioning for an Order to Show Cause, requiring the Attorney General to prove the claims before the court, or modify the charge.
In an effective rebuttal of the action, the memorandum argues that The Martin Act does not apply in the present case.
It goes on to state that USDT is neither a commodity nor a security, fails the Howey Test for determining when an instrument is a security, and in any event the action is flawed, as there are no “investors,” as claimed, for the Attorney General to prosecute on behalf of.
According to the document, “The New York 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.”
The submission was later accepted by the court, requiring the Attorney General to present the case in order for the judge to determine whether the order should stand.
In a subsequent twist, the U.S. Department of Justice announced it was holding part of the $850 million Bitfinex losses in an HSBC account it had seized in connection with fraudulent transactions between cryptocurrency exchange customers. Bitfinex is reported to have used the account to transfer funds to its own customers during a period where Wells Fargo declined to provide banking facilities to the company.
Several individuals allegedly involved in misusing the account were charged on four separate counts, namely “conspiracy to commit bank fraud, bank fraud, conspiracy to operate an unlicensed money transmitting business and operation of an unlicensed money transmitting business.”
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