In re Tether & Bitfinex Crypto Asset Litig., 19 Civ. 9236 (KPF)

CourtUnited States District Courts. 2nd Circuit. United States District Courts. 2nd Circuit. Southern District of New York
Writing for the CourtKATHERINE POLK FAILLA United States District Judge
Docket Number19 Civ. 9236 (KPF)
Decision Date28 September 2021


No. 19 Civ. 9236 (KPF)

United States District Court, S.D. New York

September 28, 2021


KATHERINE POLK FAILLA United States District Judge

In a 593-paragraph complaint, a group of individual investors who purchased cryptocommodities - a class of crypto-assets that includes bitcoin - detailed a wide-ranging conspiracy to artificially inflate the price of those cryptocommodities. The thrust of Plaintiffs' allegations is that iFinex Inc., BFXNA Inc., BFXWW Inc., Tether Holdings Limited, Tether Operations Limited, Tether Limited, Tether International Limited, DigFinex Inc., Giancarlo Devasini, Ludovicus Jan van der Velde, Philip G. Potter, Reginald Fowler, Crypto Capital Corp., Bittrex, Inc., and Poloniex, LLC (collectively, “Defendants”)[1] engaged in a scheme to make large, carefully-timed purchases of cryptocommodities using a fraudulently issued crypto-asset - called “tether” or “USDT” - in an effort to signal to the market that there was enormous, organic demand for cryptocommodities, thus causing the price of those


commodities to spike, and thereby creating and sustaining a “bubble” in the cryptocommodity market. Plaintiffs initiated this putative class action in October 2019, and bring claims against Defendants under: (i) the Sherman Act, 15 U.S.C. §§ 1-38; (ii) the Commodities Exchange Act (“CEA”), 7 U.S.C. §§ 1-27; (iii) the civil provisions of the Racketeer Influenced and Corrupt Organizations Act (“RICO”), 18 U.S.C. §§ 1961-1968; (iv) the common law tort of fraud; and (v) New York General Business Law (“GBL”) § 349, for misconduct that is alleged to have occurred from February 17, 2015, to the present (the “Class Period”).

The B/T Defendants, the Exchange Defendants, Potter, and Fowler (collectively, the “Moving Defendants”) have moved to dismiss the Amended Consolidated Class Action Complaint (the “Amended Complaint” or “CAC”) under Federal Rule of Civil Procedure 12(b)(6), and Fowler further moves to dismiss for lack of personal jurisdiction pursuant to Rule 12(b)(2). As set forth in the remainder of this Opinion, the Court grants in part and denies in part the Moving Defendants' motions to dismiss.


A. Factual Background

1. The Parties

The Tether Defendants are the central authority over and issuer of USDT - a “stablecoin, ” so called because it is purportedly pegged to and


backed by U.S. dollars held in reserve by Tether. (CAC ¶¶ 5, 29, 112-119).[3]Plaintiffs allege that Tether “represented to the market that every USDT in circulation was backed by a U.S. dollar in Tether's bank account, and holders could exchange their USDT for those dollars anytime they wished. USDT was thus held out as the digital equivalent of U.S. dollars.” (Id. at ¶ 5; see also Id. at ¶¶ 116-117). Plaintiffs further allege that USDT is the most widely used crypto-asset in the world by trading volume, and the third-largest crypto-asset in the world by market capitalization, the latter of which Plaintiffs estimate at $9.1 billion, based on the more than 9.1 billion USDT in circulation. (Id. at ¶¶ 135, 137). In 2019, Bitfinex and Tether represented that USDT possessed a near-perfect monopoly on the stablecoin market by accounting for 98.7% of worldwide stablecoin trading volumes; and Plaintiffs allege that for much of the


relevant time period, Tether had a nearly 100% market share in stablecoin. (Id. at ¶¶ 135-136).

The Bitfinex Defendants operate an online platform called “Bitfinex” for exchanging and trading crypto-assets. (CAC ¶ 25).[4] Bitfinex is one of the “largest and least regulated” crypto-exchanges in the world, and it allows users to deposit and withdraw “fiat” currency, such as U.S. dollars or euros, in addition to facilitating crypto-to-crypto transactions. (Id. at ¶ 139).

DigFinex Inc. (“DigFinex”) operates as the ultimate parent company of the Bitfinex Defendants and the Tether Defendants. (CAC ¶ 23). Plaintiffs allege that, due in part to DigFinex's common ownership and control of Bitfinex and Tether, Bitfinex and Tether are “essentially the same, ” a fact that the DigFinex Defendants purportedly concealed. (Id. at ¶¶ 7, 152-161). DigFinex is incorporated in and a citizen of the British Virgin Islands, and the Individual Defendants are among DigFinex's shareholders. (Id. at ¶¶ 23-24).

Ludovicus Jan van der Velde (“Velde”) is a citizen of the Netherlands and is the Chief Executive Officer (“CEO”) of iFinex Inc., BFXNA Inc., BFXWW Inc., and Tether Limited, positions he has held since early 2013. (CAC ¶ 34). Velde is one of two directors listed on the corporate registries of DigFinex, iFinex Inc., and Tether Limited; is a shareholder of DigFinex and Tether Holdings Limited;


and is the former CEO of Perpetual Action Group (Asia), a shareholder of DigFinex. (Id.).

Giancarlo Devasini is a citizen of Italy and the Chief Financial Officer (“CFO”) of Bitfinex and Tether. (CAC ¶ 35). Along with Velde, he is the other director identified on the corporate registries of DigFinex, iFinex Inc., and Tether Limited; and he is also a shareholder of Tether Holdings Limited and DigFinex. (Id.). Plaintiffs allege that Devasini was involved in creating Bitfinex. (Id.).

Philip G. Potter is a citizen of New York and a co-founder of Tether. (CAC ¶¶ 36, 122). He was the Chief Strategy Officer (“CSO”) of Bitfinex and Tether from in or around 2013 until “around the end of February 2018.” (Potter Br. 3; see also CAC ¶ 36). Plaintiffs allege that Potter was or is a director of Tether Holdings Limited and a shareholder of DigFinex. (CAC ¶ 36).

Bittrex and Poloniex operate online platforms for exchanging and trading crypto-assets. (CAC ¶ 37).[5] Each was founded in 2014. (Id. at ¶¶ 162, 170). As relevant here, both exchanges were, for much of the relevant period, so-called “crypto-to-crypto exchanges, ” allowing their customers to trade only different crypto-assets for each other and refusing to offer fiat-based deposits or exchanges. (Id. at ¶¶ 164-165, 172). Both exchanges are registered as money services businesses with the Department of the Treasury's Financial


Crime Enforcement Network, and both entities purport to comply with Know-Your-Customer and anti-money-laundering regulations. (Id. at ¶¶ 169, 179).

Crypto Capital Corp. (“Crypto Capital”) is incorporated in and a citizen of Panama. (CAC ¶ 40). It operated as a “payment processor” that marketed itself to crypto-asset exchanges. (Id.). Reginald Fowler, a citizen of Arizona, acted as an employee, agent, or partner of Crypto Capital, and was responsible for, inter alia, creating shell companies and opening bank accounts that could be used by Bitfinex and Tether to process U.S. dollar and other fiat currency transactions. (Id. at ¶¶ 41, 182). Plaintiffs allege that Bitfinex and Tether first partnered with Crypto Capital in 2014 and had become completely dependent on it for day-to-day business operations by 2017 - as “conventional banks began shutting down Tether and Bitfinex accounts” - to the point that, by early 2018, the CC Defendants controlled more than $1 billion of Bitfinex funds. (Id. at ¶¶ 180, 183-184).[6]

Plaintiffs Matthew Script, Jason Leibowitz, Benjamin Leibowitz, Aaron Leibowitz, and Pinchas Goldshtein are purchasers of various cryptocommodities. (See CAC ¶¶ 18-22). Plaintiffs allege that during the Class Period, they each purchased cryptocommodities at prices that had been artificially inflated by Defendants' market manipulation, causing Plaintiffs to suffer economic losses and actual damages. (Id.). Plaintiffs provide examples of specific cryptocommodity purchases made during the class period. (Id.).


Only one of the named plaintiffs, Goldshtein, is alleged to have purchased cryptocommodities futures. (Id. at ¶ 22). In particular, Goldshtein is alleged to have purchased bitcoin futures between January 16, 2018, and June 3, 2020 (shortly before the filing of the Amended Complaint). (Id.).

2. Crypto-assets and the Cryptocommodity Market

a. Types of Crypto-assets

As noted, this case involves the purportedly fraudulent creation of crypto-assets for the purpose of manipulating the market for cryptocommodities. Crypto-assets are “digital assets that use a variety of cryptographic principles to secure transactions, control the creation of additional units, and verify their transfer.” (CAC ¶ 47).[7] As of the time Plaintiffs initiated this lawsuit, there were more than 2, 000 different crypto-assets available. (Id. at ¶ 58). Of relevance to the instant suit are two types of crypto-assets: cryptocommodities and stablecoins. Plaintiffs allege that the DigFinex Defendants' dominance in the stablecoin market allowed them to directly manipulate prices in the cryptocommodity market (see Id. at ¶ 394), and for this reason, the Court considers their allegations regarding each crypto-asset and its functions in the crypto-economy.

Plaintiffs contend that cryptocommodities are distinguished from other crypto-assets by three defining features. (CAC ¶ 64). Cryptocommodities


(i) provide a secure medium of exchange for general purposes, (ii) have a controlled supply that cannot be unilaterally increased, and (iii) are decentralized. (Id.).[8] One of the first and most widely known cryptocommodities is Bitcoin. (Id. at ¶ 48).[9]

According to Plaintiffs, the first distinguishing feature of a cryptocommodity is that it provides a secure medium of exchange. Plaintiffs explain that the blockchain - a “digital ledger system” that “tracks the ownership and transfer of every bitcoin in existence” - is what allows cryptocommodities to provide a secure medium of exchange; the blockchain was a unique development for digital assets, which typically are easy to duplicate. (CAC ¶¶ 49-50). For example, the Bitcoin blockchain effectively prevents the duplication or counterfeiting of bitcoin because it: (i) provides a...

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