NY Attorney General's office alleges "substantial evidence of fraudulent conduct" at Bitfinex and Tether

The NY Attorney General's office (OAG) submitted opposition on Friday to Bitfinex's motion to void the agency’s court order that shook the crypto world late last month.

The OAG cited the so-called Martin Act in its opposition, which gives the OAG power "to conduct investigations of suspected fraud in connection with the purchase, sale, or exchange of securities and commodities." Per the filing, "the OAG's investigation uncovered substantial evidence of fraudulent conduct."

Per the filing, the OAG looked at a broad range of business practices and communications by Bitfinex and Tether, focusing on the timing of tether issuance, the relationship between the two firms, and how they communicated the backing of tethers to investors.

Furthermore they examined the “facts and circumstances of Bitfinex's undisclosed transfer of Tether's cash reserves in 2018, Bitfinex's ability to process client withdrawal requests (amid its self-admitted liquidity problems), and the manner in which Respondents' senior executives are compensated.”

In addition, the agency claims that in  “November 2018 Respondents fraudulently shifted most or all of Bitfinex's risk of loss of several hundred million dollars onto Tether's balance sheet, but continued to represent to the market that tethers were fully "backed" by U.S. dollars sitting safely in a bank account. They were not.”

The OAG summarized the alleged behavior as follows:

  • Bitfinex failed to disclose to clients that they had lost approximately $851 million of co-mingled client and corporate funds to Crypto Capital in mid-to-late 2018;
  • Bitfinex knew in mid-to-late 2018 that Crypto Capital's inability or unwillingness to return any of the funds mean that Bitfinex faced extreme difficult in filling client withdrawal requests, to the point that a senior Bitfinex executive repeatedly stated in writing that the company was unable to face client withdrawal requests. 
  • In November 2018, Respondents attempted to cover up the loss by transferring (at least) $525 million to Bitfinex from the cash reserves of Tether, which, among others things, made Tether's representations misleading, through at least February 2019, that "USDT in the market are fully backed by US dollars that are safely deposited in our bank accounts."

In conclusion, the OAG "respectfully requests that the Court deny Respondents' motion to vacate or modify the Order" based on its authority under the Martin Act, which the OAG describes as such:

“The Martin Act is designed to protect the public, and for the reasons expressed at length in this brief and in the OAG's initial application for relief, the equities favor preservation of assets for the benefit of defrauded investors... it appears likely that defendants violated the Martin Act, and the OAG is attempting to protect public interest in lawsuit."