According to a press release issued Thursday, NYAG Letitia James announced that she had obtained a court order against iFinex Inc., which operates both Bitfinex and Tether, ordering them to cease violating New York law and defrauding New York residents.
James said that an investigation by her department determined that iFinex “engaged in a cover-up to hide the apparent loss of $850 million of co-mingled client and corporate funds,” adding:
According to the statement, Bitfinex sent $850 million of customer and corporate funds to Crypto Capital Corp., a payment processor that is said to be holding funds from other exchanges as well, such as QuadrigaCX. Funds from Tether’s reserve were used to make up the shortfall, but neither the loss nor Tether’s fund movements were disclosed to customers.“New York state has led the way in requiring virtual currency businesses to operate according to the law. And we will continue to stand-up for investors and seek justice on their behalf when misled or cheated by any of these companies.”
So far, $700 million is alleged to have been transferred.
According to a filing attributed to assistant Attorney General Brian Whitehurst, the probe began sometime in 2018 and appeared to have been driven because, despite claims to the contrary, “OAG has reason to believe that Bitfinex still allows New York-based individual investors to deposit, trade, and withdraw virtual currencies, and engage in other transactions, on the Bitfinex trading platform.”
Under the court order, iFinex directors, officers, principals, agents, employees, contractors, assignees or any other affiliated individuals are to cease accessing, loaning or making any other claim to the dollar reserves held by Tether.
Similarly, iFinex-affiliated individuals are ordered to not tamper with any documentation, including records, which outline these actions.
Notably, the filing said the AG’s office is not seeking to prevent legitimate trading on Bitfinex or redemptions by Tether; on the contrary, the office wants the court to grant a preliminary injunction to “preserve the status quo” pending completion of the investigation.
The action comes months after the AG’s office published the results of its crypto exchange inquiry, focusing on a group that included Bitfinex.
The focus on Tether reserves is a notable one, given the long scrutiny directed toward the firm and its USDT stablecoin. Critics alleged that the token, with its more than $2 billion market cap, was not actually backed by sufficient funds as claimed by its operators. The failure to obtain a proper audit as previously pledged further inflamed those suspicions, and in March, Tether revealed that the reserves backing USDT may not be entirely composed of fiat currency.
AG document outlines months of turbulence
According to an affirmation attributed to assistant New York Attorney General Brian Whitehurst, discussions between the AG’s office and representatives for Bitfinex and Tether date back to November. The document states that law firms Morgan, Lewis & Bockius LLP of New York and Steptoe & Johnson LLP of Washington, D.C. jointly represented the two companies.
The affirmation details Bitfinex’s growing banking issues and its efforts to maintain services in some form, including a now-ended relationship with a Puerto Rico-based company called Noble Bank that ended in October 2019. Bitfinex and Tether’s ended their relationship with Noble because of its inability to process a high volume of wire transfers as well as low interest rates, the companies’ lawyers told the attorney general’s office.
Tether later struck up a banking relationship with Deltec in the Bahamas, as CoinDesk reported in November.
According to the AG’s office, the inability to access the $850 million in customer/corporate funds – which was blamed on payment processor Crypto Capital, according to the documents – impaired Bitfinex’s ability to process withdrawal requests. CoinDesk previously detailed these problems, with some customers complaining of long response times and delayed receipt of their money.
“Documents provided to OAG demonstrate that by mid-2018. Bifinex was having extreme difficulty honoring its clients’ requests to withdraw their money from the trading platform because Crypto Capital, which held all or almost all of Bitfinex·s funds, refused to process customer withdrawal requests and refused or was unable to return any funds to Bitfinex,” the affirmation states.
In mid-October 2018, Bitfinex released a statement declaring that withdrawal were moving “without the slightest interference” but that “processing complications” had led to the suspension of fiat deposits. This was in spite of the fact that some customers were still complaining about slow withdrawals.
According to the AG’s office, that statement wasn’t true. “Documents provided to OAG by Respondents show that during this time, Bitfinex was having severe problems processing client withdrawals,” the affirmation stated.
Representatives for Bitfinex and Tether told the AG’s office that a Bitfinex official was told the reason the $851 million couldn’t be access was because Portuguese, Polish and American government officials had “seized” the funds.
But Bitfinex, according to the document, didn’t believe this explanation.
“Based on statements made by counsel for Respondents to AG attorneys… Respondents do not believe Crypto Capital’s representations that the funds have been seized,” the affirmation states.
As noted in the AG’s press release, the inability to access these funds was kept from customers, and today’s news represents the first time the loss was disclosed publicly.
It was during this situation that Bitfinex and Tether began to discuss a way for Bitfinex to tap funds held in reserve to back the USDT token.
“In an in-person meeting on February 21, 2019. counsel for Bittinex and Tether explained that, in order to make up for the apparent loss of $851 million to Crypto Capital, Bitfinex and Tether were in the process of contemplating a transaction that would permit Bitfinex to draw upon Tether’s cash reserves on an as-needed basis,” the document states, going on to explain:
According to Whitehurst, when questioned about a possible conflict of interest given the close ties between the companies (the two firms share managers and owners), “counsel characterized the impending transaction as arms length without providing justification for how that could be the case.”“As described by counsel. Bitfinex would take a ‘line of credit’ of $600 to $700 million on the reserve funds backing tethers. Counsel did not suggest what if any. benefit would accrue to Tether or holders of tethers, from this transaction. Nor did counsel suggest that this transaction would be disclosed to the public. including investors trading on the Bitfinex platform or holders of tether.”
These disclosures were a cause for concern within the AG’s office, according to the document.
“Counsel’s disclosures at the February 21 meeting raised serious questions about the viability of Bitfinex as an ongoing concern, the possibility that Tether’s cash reserves would be dissipated and unrecoverable, and whether Bitfinex and Tether have misled their clients (including both clients of the Bitfinex trading platform. and holders of tethers) regarding the matters described above,” Whitehurst said.
The coming weeks would see the AG’s office continue to seek information from Bitfinex and Tether, including data on tether issuances and documents supporting their claims regarding the $850 million loss.
“On March 4, 2019 counsel for Bitfinex and Tether responded to OAG’s letter with an email stating, ‘it is not possible to get this information by March 1.’ Counsel did not provide an alternative production date to OAG,” the affirmation states.
On March 29, after further discussions, the representatives disclosed in a letter to the AG that the credit line had been closed and “during November 2018, Tether transferred $625 million held in its account at Deltec to Bitfinex’s account at Deltec. Bitfinex, in turn, caused a total [of] $625 million to be transferred from Bitfinex’s account at Crypto Capital to Tether·s account at Crypto Capital, through a ledger entry at Crypto Capital crediting Tether·s account in the amount of $625 million and debiting Bitfinex ·s account by a corresponding amount. The purpose of this exchange was to allow Bitfinex to address liquidity issues unrelated to tethers.”
Subsequently, an arrangement was struck to create a $900 million line of credit, with a three-year term and an interest rate of 6.5 percent.
“Under this transaction, the line of credit is secured by a share charge over 60,000,000 iFinex Inc. shares owned by DigFinex. which DigFinex agreed not to otherwise encumber. That transaction closed on or about March 19.20 19. The total assessed under the loan facility as of today’s date is equal to $700 million,” the representatives’ letter states, going on to conclude:
According to the affirmation, this credit line — in addition to the inability to access the $850 million — was not disclosed to investors.”On March 27, 20 19, Bitfinex and Tether initiated a transaction debiting $625 million previously credited to Tether’s account at Crypto Capital. and transferring those funds to Bitfinex·s account at Crypto Capital. This transaction was made because the prior exchange or assets was converted into a line of credit secured by the DigFinex shares.”
“Respondents have only produced limited relevant information regarding the facts and circumstances of the $625 million transfer and the subsequent ‘line of credit’ transaction,” it states.
Late Thursday, Bitfinex issued the following statement:
Earlier today, the New York Attorney General’s office released an order it obtained – without notice or a hearing – in an attempt to compel Bitfinex and Tether to provide certain documents and seeking certain injunctive relief.
The New York Attorney General’s court filings were written in bad faith and are riddled with false assertions, including as to a purported $850 million “loss” at Crypto Capital. On the contrary, we have been informed that these Crypto Capital amounts are not lost but have been, in fact, seized and safeguarded. We are and have been actively working to exercise our rights and remedies and get those funds released. Sadly, the New York Attorney General’s office seems to be intent on undermining those efforts to the detriment of our customers.
Bitfinex and Tether have been fully cooperative with the New York Attorney General’s office, as both companies are with all regulators. The New York Attorney General’s office should focus its efforts on trying to aid and support our recovery efforts.
Both Bitfinex and Tether are financially strong – full stop. And both Bitfinex and Tether are committed to fighting this gross overreach by the New York Attorney General’s office against companies that are good corporate citizens and strong supporters of law enforcement. Bitfinex and Tether will vigorously challenge this, and any and all other actions, by the New York Attorney General’s office.