James v. Ifinex Inc.

• Decision Date: 09 July 2020
• Docket Number: 11320,Index 450545/19
• Citation: 185 A.D.3d 22,127 N.Y.S.3d 456
• Parties: In re Letitia JAMES, etc., Petitioner–Respondent, v. IFINEX INC., et al., Respondents–Appellants.
• Court: New York Supreme Court — Appellate Division

185 A.D.3d 22

127 N.Y.S.3d 456

In re Letitia JAMES, etc., Petitioner–Respondent,

v.IFINEX INC., et al., Respondents–Appellants.

11320

Index 450545/19

Supreme Court, Appellate Division, First Department, New York.

ENTERED: JULY 9, 2020

Steptoe & Johnson LLP, New York (Charles A. Michael of counsel), and Morgan Lewis & Bockius LLP, New York (Zoe Phillips of counsel), for appellants.

New York State Office of the Attorney General, New York (Philip J. Levitz, Scott A. Eisman and Steven C. Wu of counsel), for respondent.

Judith J. Gische, J.P., Ellen Gesmer, Jeffrey K. Oing, Peter H. Moulton, JJ.

GESMER, J.

This case raises important issues about the scope of the authority of petitioner, the Attorney General of the State of New York, to investigate fraud under the Martin Act. The trial court properly rejected the attempts by respondents to limit petitioner's lawful authority to protect New York residents.

Respondents BFXNA Inc. and BFXWW Inc. are wholly-owned subsidiaries of respondent iFinex (collectively iFinex). iFinex operates a trading platform known as Bitfinex on which virtual currencies can be exchanged. Respondent Tether Holdings Limited is the holding company for respondents Tether Limited, Tether Operations Limited, and Tether International Limited (collectively Tether Holdings). Tether Holdings's main activity is to issue a virtual "stablecoin" currency known as "tether" (referred to below as tether ). Stablecoin is a type of virtual currency that is designed to minimize price volatility by being pegged to a stable asset or currency. Until on or about March 4, 2019, respondent Tether Holdings represented that every tether is "backed" by one U.S. dollar, and any holder of tether may redeem it for one U.S. dollar at any time. After that date, Tether Holdings changed its representation on its website to state that, while every tether is still valued at one U.S. dollar, tether is backed by Tether Holding's "reserves," which include unspecified currency, "cash equivalents," and "other assets and receivables from loans made by Tether [Holdings] to third parties," including to affiliated entities.

Nonparty Digfinex Inc. is the majority owner of iFinex and Tether Holdings. A small group of executives and employees, some of whom are or have been located in New York, operates all respondents. Each of respondents is incorporated outside of the United States and does not have a central headquarters, and none is registered for service of process in New York.

In November 2018, petitioner commenced an investigation of respondents pursuant to the Martin Act, which gives the Attorney General "broad regulatory and remedial powers" to "investigat[e] and interven[e] at the first indication of possible ... fraud on the public and, thereafter, if appropriate, to commence civil or criminal prosecution" ( Assured Guar. [U.K.] Ltd. v. J.P. Morgan Inv. Mgt. Inc., 18 N.Y.3d 341, 350, 939 N.Y.S.2d 274, 962 N.E.2d 765 [2011] [internal quotation marks omitted]; see General Business Law [GBL] 352[1] ). Petitioner began the investigation as a result of her concern that respondents lacked sufficient liquidity to permit customers to redeem tether at the represented value.

Petitioner served subpoenas on third parties pursuant to the Martin Act ( GBL 352 ) and Executive Law § 63(12), seeking information regarding respondents' activities. After learning of this, respondents' counsel contacted petitioner on November 3, 2018 and agreed to accept service of subpoenas by email on behalf of respondents. Petitioner then delivered subpoenas seeking information and documents from January 1, 2015 forward. Respondents' counsel accepted service of the subpoenas and produced some of the requested documents and information.

In early 2019, petitioner's investigation revealed information that respondents had not disclosed to her, although it came within the scope of the information sought by the subpoenas. Respondents had previously explained to petitioner that many banks and other traditional financial institutions will not do business with unregulated or off-shore companies dealing in virtual currency. As a result, beginning in 2014, iFinex had used a third-party foreign entity to process customer deposits and withdrawals. In or about February 2019, petitioner learned that, since mid–2018, this entity had refused to provide iFinex with close to $1 billion of their commingled client and corporate funds. In addition, respondents advised petitioner that, in November 2018, Tether Holdings had transferred $625 million to iFinex, and that iFinex was planning to take a $900 million line of credit from Tether Holdings. Petitioner expressed concern that the latter transaction might constitute a conflict of interest, but respondents nevertheless went ahead with the transaction and only told petitioner that they had done so after the deal had closed.

Concerned that these events indicated that iFinex was in serious financial trouble, that Tether Holdings' cash reserves backing tether would be dissipated, and that respondents had misled their customers in relation to these events, petitioner sought an order pursuant to GBL 354. That provision of the Martin Act permits the Attorney General to seek an ex parte order in Supreme Court requiring the subjects of an investigation to produce documents and testify under oath, and authorizes the court to issue a "preliminary injunction or stay as may appear to [it] to be proper and expedient" ( GBL 354 ). In response to petitioner's request, Supreme Court issued an ex parte order dated April 24, 2019, which directed respondents to produce certain documents and stayed them from 1) taking any further action to "make any [ ] claim ... on the U.S. dollar reserves held by Tether" [Holdings]; 2) making any payments to any individual associated with respondents "from the U.S. dollar reserves held by Tether" [Holdings]; and 3) altering or destroying any documents related to the investigation. Petitioner served the ex parte order on respondents, pursuant to its terms, by sending a copy of it, together with the papers on which it was based, to respondents' counsel by email, overnight delivery and hand delivery.

On or about April 30, 2019, respondents moved to modify or vacate the ex parte order. By order dated May 16, 2019, Supreme Court granted respondents' motion in part by modifying the temporary restraining order, but denied their motion to vacate it.¹

On or about May 21, 2019, respondents made the instant motion, which they style as a motion to dismiss on the basis of lack of subject matter jurisdiction ( CPLR 3211[a][2] ) and lack of personal jurisdiction ( CPLR 3211[a][8] ). Supreme Court denied the motion by order entered on August 19, 2019, and respondents now appeal.

At the outset, under the Martin Act's statutory scheme, once Supreme Court has issued an order responding to a GBL 354 application, it has no further role in the Attorney General's investigation, except to rule on a motion by either party to vacate or modify the order, as respondents made here. Accordingly, once the court issued the order authorized by GBL 354 on April 24, 2019, and modified it by order dated May 16, 2019, the proceeding before it was concluded and there was no action or proceeding for Supreme Court to "dismiss" on May 21, 2019 when respondents filed their motion that resulted in the order now before the court. All that remained was the Attorney General's ongoing investigation, in which, by statute, the courts have no further role at this stage. Indeed, neither party cites to, and this Court is unaware of, any prior case in which the subject of a Martin Act investigation has moved to "dismiss" an application by the Attorney General for an order pursuant to GBL 354. Nevertheless, I consider each of respondents' three arguments in support of their appeal of the motion court's August 19, 2019 order, and reject each for the reasons discussed below.

First, respondents argue that tether does not qualify as a security or commodity as those terms are defined in the Martin Act, and that the motion court thus lacked subject matter jurisdiction over them. I disagree for three reasons. As an initial matter, Supreme Court has broad general original jurisdiction, including to hear applications by the Attorney General for orders pursuant to GBL 354 under the Martin Act. Accordingly, as the motion court correctly found, respondents' challenge is actually to petitioner's authority to investigate their activities, rather than the court's jurisdiction to hear a GBL 354 application.

Moreover, the May 16, 2019 order on respondent's motion to vacate or modify the ex parte order rejected respondents' subject matter jurisdiction argument. Respondents failed to appeal from that order.

Finally, even if the court were to consider respondents' argument on the merits, the Martin Act's definition of commodities as including "any foreign currency, any other good, article, or material" ( GBL 359–e[14] ) is broad enough to encompass tether.² Indeed, federal courts and the Commodities Futures Trading Commission have found that virtual currencies are commodities under the Commodities Exchange Act, which defines the term more narrowly than does the Martin Act ("all other goods and articles ... and all services rights and interests ... in which contracts for future delivery are presently or in the future dealt in " [ 7 USC § 1a(9) (emphasis added) ]; Commodities Future Trading Commn. v. McDonnell, 287 F. Supp. 3d 213, 224–226 [E.D. N.Y.2018] ; Matter of Coinflip, Inc., 2015 WL 5535736, *2, 2015 CFTC LEXIS 20 [Sept. 17, 2015, CFTC Docket No. 15–29] ).

Accordingly, the motion court properly denied the branch of respondents' motion to dismiss based on subject matter jurisdiction.

Next, respondents argue that Supreme Court lacked specific personal jurisdiction over them because petitioner failed to demonstrate a sufficient connection between respondents' activity in New York and the...