Bitfinex’s lawyers argued on Sunday that clients might suffer if it is unable to access a line of credit from Tether.
In a recent filing, attorneys Zoe Phillips and David Miller of Morgan, Lewis & Bockius, and Charles Michael and Jason Weinstein of Steptoe & Johnson, outlined some arguments for why the recent preliminary injunction secured by the New York Attorney General must be modified or canceled.
According to the lawyers, the injunction would hurt the customers of the startups, and in turn the market in general.
“The balance of equities strongly favors Bitfinex and Tether, because a preliminary injunction would not protect anyone but would instead cause great disruption to Bitfinex and Tether—ultimately to the detriment of market participants on whose behalf the Attorney General purports to be acting,” they wrote.
Since the filing of the injunction, Bitfinex users have withdrawn at least one million ether and 30,000 Bitcoin, showing its “significant” impact on the exchange, the filing read. The market cap of “dozens of cryptocurrencies” already lost $10 billion one hour after the order was released on April 24.
The impact on Tether’s dollar-pegged crypto, USDT, has been way smaller, as “Tethers still trade at par to this day, despite this proceeding,” the filing notes.
The preliminary injunction, filed under the Martin Act, orders Tether and Bitfinex to turn over all documents related to the $625 million transfer as well as a subsequent $900 million line of credit extended by Tether to Bitfinex when the latter lost access to the $850 million held by Crypto Capital.
In addition, the injunction restricts Bitfinex from further drawing on the line of credit from Tether. In a filing last week, the general counsel to both companies, Stuart Hoegner, stated that the agreements were made to protect the wider crypto ecosystem, since “Tether, and holders of tether, have a keen interest in ensuring that one of the dominant trading platforms of tethers has sufficient liquidity for normal operations.”
Per the NYAG’s office, the preliminary injunction does not stop Tether or Bitfinex from conducting operations, and it seeks better clarity on the “core issues in this case,” referring to accusations that the firms misled clients. The first public hearing will take place in Manhattan.
The companies’ lawyers claimed that the preliminary injunction is broader than the NYAG lets on.
Although the NYAG’s initial response noted that its injunction was “narrow” in scope and merely prevented Tether and Bitfinex from tapping the former’s reserves, Tether’s lawyers claim it has a far-reaching impact.
The filing states that Bitfinex “needs the ‘liquidity for normal operations.” The exchange previously said it was utilizing Tether’s funds to process the withdrawals of its clients.
Moreover, the filing mentioned that Tether’s reserves might be used for other purposes, noting:
“This means that Tether must hold its $2.1 billion cash (and equivalent) reserves as is, without deploying those funds for any investment or other useful purpose, for the indefinite future.”
The filing also indicates that “the Attorney General is attempting to dictate how two private companies may deal with one another, and deploy their funds,” but the same person—Tether director and Bitfinex CFO Giancarlo Devasini—signed both firms’ agreements.
The two companies’ lawyers claim the NYAG’s office do not have legal standing since no fraud occurred.
“The Attorney General faults Bitfinex and Tether for (i) having ‘failed to disclose the loss of over $850 million’ in connection with the Crypto Capital deposits, and of (ii) engaging in an ‘undisclosed, conflicted’ transaction that their customers ‘would find material,’” the filing states, adding: “Neither of these amounts to fraud.”
The attorneys also argue that the Martin Act only covers fraudulent conduct as it relates to commodities or securities, but the NYAG’s office failed to prove that tethers qualify as either.
“Rather than meaningfully addressing this basic problem of the Attorney General’s jurisdiction, the Attorney General states in a footnote that this is a ‘fact-intensive question’ better left until another day, citing no evidence to support how tethers fall within the Martin Act,” the filing reads.
According to securities lawyer Scott Andersen, who formerly worked for the NYAG’s office, “what the [NYAG]’s office wants to establish is that there are New Yorkers who could be hurt by [the startups’ actions.]”
“New York wants to show that New York has a very real interest to protect New Yorkers, [and] unless the respondents can prove that New York doesn’t have jurisdiction, they have to produce the records,” he noted.