On April 25, 2019, the New York Attorney General announced that it had obtained a court order enjoining iFinex Inc. (operator of the Bitfinex digital asset trading platform), Tether Limited (issuer of the “tether” stablecoin) and their affiliated entities from further violations of New York law in connection with ongoing activities that the Attorney General alleges may have defrauded New York investors that trade in virtual currencies. The Attorney General’s investigation focuses on the potential loss or dissipation of over $850 million in customer funds. Bitfinex subsequently issued its own statement denying the Attorney General’s claims and insisting that “we have been informed that these… amounts are not lost but have been, in fact, seized and safeguarded” by unnamed parties.
The Attorney General’s investigation stems from its September 2018 Virtual Markets Integrity Initiative and is proceeding under New York’s powerful Martin Act, a securities antifraud statute that, unlike federal law, requires no showing of intentional wrongdoing or even negligence on the part of a defendant in a civil action. According to the court’s order, the companies must immediately cease further dissipation of the U.S. dollar assets that back “tether” tokens while the Attorney General’s investigation continues, and the companies must also produce various books and records, including material called for by the Attorney General’s previously-issued investigative subpoenas. Additionally, the companies are barred from destroying, deleting or permitting others to delete potentially relevant documents and communications.
The Virtual Markets Integrity Initiative suggested that the Attorney General was opening up a new front in its oversight of the burgeoning market for digital assets. This action confirms that the Attorney General will vigorously enforce New York law when the agency suspects harm to New York investors in the digital asset space.