James v. IFINEX Inc.

• Decision Date: 19 August 2019
• Docket Number: INDEX NO. 450545/2019
• Citation: 2019 NY Slip Op 32454 (U)
• Parties: IN THE MATTER OF THE INQUIRY BY LETITIA JAMES, ATTORNEY GENERAL OF THE STATE OF NEW YORK, Petitioner, v. IFINEX INC., BFXNA INC., BFXWW INC., TETHER HOLDINGS LIMITED, TETHER OPERATIONS LIMITED, TETHER LIMITED, TETHER INTERNATIONAL LIMITED Respondents.
• Court: New York Supreme Court

2019 NY Slip Op 32454(U)

IN THE MATTER OF THE INQUIRY BY LETITIA JAMES,ATTORNEY GENERAL OF THE STATE OF NEW YORK, Petitioner, v. IFINEX INC., BFXNA INC., BFXWW INC., TETHER HOLDINGS LIMITED, TETHER OPERATIONS LIMITED,TETHER LIMITED, TETHER INTERNATIONAL LIMITEDRespondents.

INDEX NO. 450545/2019

SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK: COMMERCIAL DIVISION PART 3

August 19, 2019

NYSCEF DOC. NO. 115

MOTION DATE05/22/2019

MOTION SEQ.NO.003

DECISION + ORDER ON MOTION

HON. JOEL M. COHEN:

The following e-filed documents, listed by NYSCEF document number (Motion 003) 77, 78, 79, 80, 81, 82, 83, 84, 85, 86, 87, 88, 89, 90, 91, 92, 93, 94, 95, 96, 97, 98, 99, 100, 101, 102, 103, 104, 105, 106, 107, 108, 109, 110, 111, 112, 113 were read on this motion to DISMISS.

Respondents seek to terminate this Martin Act action on the ground that the Court lacks personal and subject matter jurisdiction.¹Specifically, they contend that their businesses (mainly, an off-shore cryptocurrency exchange and a "stablecoin" currency called "tether" purportedly backed by U.S. dollar reserves) do not have a connection to New York sufficient to trigger personal jurisdiction.They also contend that Petitioner's "extraterritorial" investigation into their business activities (which they claim does not involve "securities" or "commodities") is beyond the scope of her enforcement authority under the Act, and thus this Court does not have subject matter jurisdiction to facilitate that investigation.

In response, Petitioner(the Attorney General of the State of New York) asserts that it is premature for the Court to address jurisdictional questions during an ongoing investigation.She also points to evidence of Respondents' past and current activities in and affecting New York; this Court's broad statutory mandate under N.Y. Gen. Bus. Law §354 to enforce her investigatory information requests; and her own broad authority to investigate allegedly fraudulent activities that impact New York commerce.

The Court disagrees with Petitioner that it is (or can be) premature for the Court to determine whether it has jurisdiction to issue orders impacting the rights of Respondents in this proceeding.That said, the Court finds based on the evidence and applicable law that it has jurisdiction - and a clear statutory mandate - to adjudicate this matter.Accordingly, Respondents' motion is denied, and the temporary stay of the investigation is dissolved.²

BACKGROUND

In an ex parte order dated April 24, 2019, pursuant to §354 of the Martin Act, the Court(James, J.) required Respondents to comply with Petitioner's document and information demands and preliminarily enjoined Respondents from undertaking several broad categories of activities and transactions.(NYSCEF Dkt. No. 35)("April 24 Order").

In a subsequent Decision and Order dated May 16, 2019, this Court granted in part and denied in part Respondents' motion to vacate or modify the April 24 Order(the "May 16 Order").(NYSCEF Dkt. No. 76).The Court denied the motion to the extent it sought to vacate or modify the Petitioner's document and information demands.In doing so, the Court rejected Respondents' argument that "the investigation is outside the broad scope of the Martin Actbecause 'tether' does not constitute a 'security,'" reasoning that "it [was] premature and inconsistent with section 354 for the Court to interpose itself to truncate Petitioner's investigation."(Id. at 8).But the Court granted in part Respondents' motion by modifying the terms of the preliminary injunction.(Seeid. at 13("[T]he Court finds that the preliminary injunction should be tailored to address OAG's legitimate law enforcement concerns while not unnecessarily interfering with Respondents' legitimate business activities")).

Five days later, Respondents moved by order to show cause to dismiss this proceeding for lack of personal and subject matter jurisdiction.In addition, Respondents sought to stay the April 24 Order's discovery requirements pending this Court's decision on the instant motion or, alternatively, pending an emergency appeal.The Court granted that request in part, ordering that "pending the hearing on Respondents' motion to dismiss, the production demands to Respondents pursuant to the April 24 Order shall proceed solely with respect to topics deemed by the Special Referee to be relevant to whether Respondents are subject to personal jurisdiction in this Court for purposes of this special proceeding, and are otherwise stayed."(NYSCEF Dkt. No. 80)(the "May 22 Order").

The basic facts regarding the scope of the investigation and Respondents' businesses are set forth in the May 16 Order (NYSCEF Dkt. No. 76) and are incorporated herein by reference.The following additional facts are relevant to resolution of the present motion.

A.Tethers as "Securities or Commodities"

The Martin Act prohibits, among other things, fraudulent practices "relating to the purchase, exchange, investment advice or sale of securities or commodities."N.Y. Gen. Bus. Law §352.The question of whether tethers count as "securities or commodities" is one of the primary disputes in this case.

According to Respondents: "Tethers are a form of 'stablecoins,' which means their value is pegged to traditional currency like U.S. Dollars and Euros.With certain restrictions, tethers can be redeemed on a one-to-one basis for the traditional currency in which they are denominated.Tether tokens do not constitute an ownership interest in Tether.Stablecoins are generally not bought for investment purposes; their main function is to facilitate other virtual currency transactions."(Respt's' Mem. of Lawat 4)(NYSCEF Dkt. No. 79)(internal citations omitted).For these and other reasons, Respondents insist that tethers cannot be considered a security or a commodity as those terms are defined under the Martin Act and relevant case law.

Petitioner opposes such categorical determinations at this stage as premature, stating that "there is reason to believe that some of the instruments are or could be found ultimately in a plenary Martin Act action to be securities or a commodity."(July 29, 2019 Oral Arg. Tr. ("Oral Arg. Tr.")at 19).Put simply, Petitioner wants to gather more facts before a determination is made.Petitioner points to, among other evidence, the dealing of tethers on online exchanges, as well as Respondents' recent "initial exchange offering," which Petitioner alleges "has every indicia of a securities issuance subject to the Martin Act."(Pet'r's Mem. of Lawat 16)(NSYCEF Dkt. No. 110);seeAffirmation of Brian M. Whitehurst ("Whitehurst Aff.")¶¶54-64 (NYSCEF Dkt. No. 81).

B.Respondents' Presence in New York

In support of their motion to dismiss, Respondents also insist that they have, for the last couple of years, purposefully avoided contact with New York.They acknowledge candidly that they have done so to "avoid the type of regulation [Petitioner] is trying to foist upon Respondents here."(NYSCEF Dkt. No. 112at 13.)

In January 2017, Bitfinex's Terms of Service were revised to ban New York customers from using its trading platform.(Affirmation of Stuart Hoegner ("Hoegner Aff.") ¶8)(NYSCEF Dkt. No. 78).Those Terms now prohibit "any Person that resides, is located, has a place of business or conducts business in the State of New York" from transacting on Bitfinex.(Id.¶10).By August 2018, Bitfinex had extended this ban to cover all "U.S. Persons."(Id.¶9).Tether, meanwhile, says it ceased servicing U.S. Persons, including United States individual and corporate customers, as of November 2017.(Id.¶12).Tether's Terms of Service, like Bitfinex's, prohibit any person who "resides, is located, has a business, or conducts business in the State of New York" from using Tether.(Id.¶13).Both companies, moreover, state that they conduct screening to prevent U.S. customers from opening accounts on their sites and terminate accounts that are later discovered to belong to U.S. customers.(Id.¶14).Respondents also assert that neither Bitfinex nor Tether advertise or market to individuals or entities in New York or the United States.(Id.¶16).

In response, Petitioner notes, first, that her investigation concerns Respondents' activities dating back to at least January 2015, well before the changes in Respondents' formal Terms of Service.(WhitehurstAff. ¶¶8, 17).Moreover, OAG asserts that notwithstanding the changes in Respondents' Terms of Service, Respondents have continued to maintain "substantial ties" to New York.OAG represents that its ongoing investigation has found, among other things, evidence that Respondents:

• Allowed some customers located in New York to transact on the Bitfinex trading platform after January 30, 2017(id.¶9);

• Knowingly permitted New York-based traders to use Bitfinex (id.¶13);

• Agreed to loan tethers to a New York-based virtual currency trading firm as late as 2019(id.¶22);• Opened accounts and utilized services at New York-based banks (id.¶¶23-27); and

• Had a physical presence in New York until at least 2018, through an executive who resided in and conducted work from the state(id.¶38).

Against that factual and procedural backdrop, the Court now turns to the substance of Respondents' motion to dismiss.

LEGAL ANALYSIS

A.Personal Jurisdiction

1.Respondents May Challenge Personal Jurisdiction

Nothing in the Martin Act or the CPLR prohibits or limits Respondents from challenging the Court's exercise of personal jurisdiction in the context of a pending investigation.

"[P]ersonal jurisdiction involves the power, or reach, of a court over a party, so as to enforce judicial decrees."Keane v. Kamin, 94 N.Y.2d 263, 265(1999).While the Martin Act gives the Attorney General"powerful tools to obtain information in aid of her investigation and instructs this Court to facilitate [her] exercise of her statutory authority,"(May 16 Orderat 7), personal jurisdiction remains a...