In re Tether and Bitfinex Crypto Asset Litigation
Complaint — Document #1
District Court, S.D. New York
Description
COMPLAINT against BFXNA Inc., BFXWW Inc., Crypto Capital Corp., Giancarlo Devasini, DigFinex Inc., Reginald Fowler, Global Trade Solutions AG, Philip G. Potter, Tether Holdings Limited, Tether International Limited, Tether Limited, Tether Operations Limited, iFinex Inc., Ludovicus Jan van der Velde. (Filing Fee $ 400.00, Receipt Number ANYSDC-17724400)Document filed by Benjamin Leibowitz, David Leibowitz, Jason Leibowitz, Aaron Leibowitz, Pinchas Goldshtein. (Attachments: # 1 Exhibit 1, # 2 Exhibit 2, # 3 Exhibit 3, # 4 Exhibit 4, # 5 Exhibit 5, # 6 Exhibit 6, # 7 Exhibit 7, # 8 Exhibit 8, # 9 Exhibit 9, # 10 Exhibit 10, # 11 Exhibit 11, # 12 Exhibit 12, # 13 Exhibit 13, # 14 Exhibit 14, # 15 Exhibit 15, # 16 Exhibit 16, # 17 Exhibit 17, # 18 Exhibit 18, # 19 Exhibit 19, # 20 Exhibit 20, # 21 Exhibit 21, # 22 Exhibit 22, # 23 Exhibit 23, # 24 Exhibit 24, # 25 Exhibit 25, # 26 Exhibit 26, # 27 Exhibit 27, # 28 Exhibit 28, # 29 Exhibit 29, # 30 Exhibit 30, # 31 Exhibit 31, # 32 Exhibit 32, # 33 Exhibit 33, # 34 Exhibit 34, # 35 Exhibit 35, # 36 Exhibit 36, # 37 Exhibit 37, # 38 Exhibit 38, # 39 Exhibit 39, # 40 Exhibit 40, # 41 Exhibit 41, # 42 Exhibit 42, # 43 Exhibit 43, # 44 Exhibit 44, # 45 Exhibit 45, # 46 Exhibit 46, # 47 Exhibit 47, # 48 Exhibit 48, # 49 Exhibit 49, # 50 Exhibit 50, # 51 Exhibit 51)(Delich, Joseph) (Entered: 10/07/2019)
Case 1:19-cv-09236-KPF Document 1 Filed 10/06/19 Page 1 of 95
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
DAVID LEIBOWITZ, BENJAMIN
LEIBOWITZ, JASON LEIBOWITZ,
AARON LEIBOWITZ, and PINCHAS
GOLDSHTEIN
Plaintiffs,
v.
No. __________________
IFINEX INC., BFXNA INC., BFXWW
INC., TETHER HOLDINGS LIMITED, JURY TRIAL DEMANDED
TETHER OPERATIONS LIMITED,
TETHER LIMITED, TETHER
INTERNATIONAL LIMITED,
DIGFINEX INC., PHILIP G. POTTER,
GIANCARLO DEVASINI,
LUDOVICUS JAN VAN DER VELDE,
REGINALD FOWLER, CRYPTO
CAPITAL CORP., and GLOBAL TRADE
SOLUTIONS AG,
Defendants.
CLASS ACTION COMPLAINT
Kyle W. Roche (admission pending) Velvel (Devin) Freedman
Joseph M. Delich (pro hac pending)
ROCHE FREEDMAN LLP ROCHE FREEDMAN LLP
185 Wythe Ave. F2 200 South Biscayne Boulevard
Brooklyn, NY 11249 Suite 5500
kyle@rochefreemdan.com Miami, Florida 33131
jdelich@rochefreedman.com vel@rochefreedman.com
Case 1:19-cv-09236-KPF Document 1 Filed 10/06/19 Page 2 of 95
Plaintiffs David Leibowitz, Benjamin Leibowitz, Jason Leibowitz,
Aaron Leibowitz, and Pinchas Goldshtein individually and on behalf of all others
similar situated, bring this action against iFinex Inc., BFXNA Inc., BFXWW Inc.,
Tether Holdings Limited, Tether Operations Limited, Tether Limited, Tether
International Limited, DigFinex Inc., Philip G. Potter, Giancarlo Devasini,
Ludovicus Jan van der Velde, Reginald Fowler, Crypto Capital Corp., and Global
Trade Solutions AG. (collectively, “Defendants”), and allege as follows:
I. INTRODUCTION
The methods and techniques of manipulation
are limited only by the ingenuity of man.1
1. This action concerns a sophisticated scheme that coopted a disruptive
innovation — cryptocurrency — and used it to defraud investors, manipulate
markets, and conceal illicit proceeds.
2. Part-fraud, part-pump-and-dump, and part-money laundering, the
scheme was primarily accomplished through two enterprises — Bitfinex and Tether
— that commingled their corporate identities and customer funds while concealing
their extensive cooperation in a way that enabled them to manipulate the
cryptocurrency market with unprecedented effectiveness.
1
Cargill, Inc. v. Hardin, 452 F.2d 1154, 1163 (8th Cir. 1971).
2
Case 1:19-cv-09236-KPF Document 1 Filed 10/06/19 Page 3 of 95
3. Founded in 2012, Bitfinex is one of the world’s largest cryptocurrency
exchanges — a marketplace for individuals to buy and sell various cryptocurrencies.
4. Tether is the central authority over the cryptocurrency called “tether,”
or “USDT” 2 — one of the world’s first “stablecoins.” While most cryptocurrencies
are not backed by tangible assets, “stablecoins,” such as USDT, aim to solve the
volatility inherent in cryptocurrency by pegging themselves to a tangible asset held
in reserve.
5. Together, Bitfinex and Tether manipulated a market that, by design, is
supposed to be decentralized.
6. At the heart of this scheme was Tether’s claim “that the number of
[USDT] tokens in circulation will always equate to the dollars in its bank account.”
This claim enabled Bitfinex and Tether to signal to the market that there was rapidly
growing demand for cryptocurrencies because each USDT printed represented
another U.S. dollar invested into the market.
7. This claim was a lie.
8. Tether issued extraordinary amounts of unbacked USDT to manipulate
cryptocurrency prices. Because the market believed the lie that one USDT equaled
2
Hereinafter, for purposes of clarity, this Complaint will refer to Tether the company as
“Tether” and tether the cryptocurrency as USDT, which is short for “United States Dollar
Tether.” Tether does issue other “tether” coins “pegged” to different currencies, for example the
“Euro tether” (EURT), which are similarly referred to by their trading symbols.
3
Case 1:19-cv-09236-KPF Document 1 Filed 10/06/19 Page 4 of 95
one U.S. dollar, Bitfinex and Tether had the power to, and did, manipulate the market
on an unprecedented scale to profit from boom-and-bust cycles they created.
9. From 2017 through 2018, Tether printed 2.8 billion USDT and used it
to flood the Bitfinex exchange and purchase other cryptocurrencies. This artificially
inflated demand for cryptocurrencies and caused prices to spike.
10. As the cryptocurrency market reached a fever pitch, Tether’s mass
issuance of USDT created the largest bubble in human history. When it burst, over
$450 billion of value disappeared in less than a month. The fallout continues to affect
the cryptocurrency market, including by causing prices to be lower than they would
have been but for the manipulation.
3
3
Exhibit 1, Eric Lam, Mathieu Benhamou & Adrian Leung, Did Bitcoin Just Burst? How
It Compares to History’s Biggest Bubbles, BLOOMBERG (Jan. 17, 2018), https://perma.cc/DL4Z-
6JDQ.
4
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11. As explained below, economists estimate that from 2017 to 2018 as
much as half the growth in the cryptocurrency market was driven by Bitfinex and
Tether’s manipulative scheme.
12. In a brash display of lawlessness, Tether and Bitfinex continue to
defraud the market, even in the face of an ongoing investigation by the New York
Attorney General, the CFTC, and the Department of Justice.
13. Fully aware of the incredible harm they’ve inflicted on the
cryptocurrency market, on October 5, 2019, Bitfinex and Tether published
statements where they generally described the allegations contained herein, admitted
that they “fully expect” to be sued, and stated that they “would not be surprised if
just such a lawsuit will be filed imminently.”4
14. Calculating damages at this stage is premature, but there is little doubt
that the scale of harm wrought by the Defendants is unprecedented. Their liability to
the putative class likely surpasses $1.4 trillion U.S. dollars.5
4
Bitfinex Anticipates Meritless and Mercenary Lawsuit Based on Bogus Study,
BITFINEX.COM (Oct. 5, 2019), https://perma.cc/9TTB-27B8; Tether Anticipates Meritless and
Mercenary Lawsuit Based on Bogus Study, TETHER.TO (Oct. 5, 2019), https://perma.cc/Z7H3-
2YA2.
5
“The combined market capitalization of all virtual currencies as of January 6, 2018, was
roughly $795 billion; by Feb. 6, 2018, the total value had dropped to $329 billion.” CFTC v.
McDonnell, 287 F. Supp. 3d 213, 219 (E.D.N.Y. 2018). This time period alone represents
potential damages of $466 billion before being trebled under the antitrust and RICO statutes.
5
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II. PARTIES
A. Plaintiffs
15. Plaintiff David Leibowitz is a citizen of West Palm Beach, Florida.
Since July 2014, David has held a legal interest in the cryptocurrencies bitcoin and
bitcoin cash through his holdings in the Pantera Bitcoin Fund Ltd.6 During the
relevant time period, David also personally owned the cryptocurrencies ether and
litecoin.
16. Jason Leibowitz is a citizen of New York, New York. During the
relevant time period, Jason Leibowitz owned bitcoin, bitcoin cash, ether, ether
classic, litecoin, bitcoin gold, Ripple XRP, Stellar Lumens, Tron, QTUM, Monero,
ZCash, Dash, Augur, NEO, EOS, WAVES, OMG, Cardano, NEM, IOTA, POWR,
ICON, and STEEM.
17. Benjamin Leibowitz is a citizen of New York, New York. During the
relevant time period, Benjamin Leibowitz owned bitcoin, bitcoin cash, ether,
litecoin, bitcoin gold, Ripple XRP, Stellar Lumens, Monero, ZCash, OMG, Cardono,
NEO, and POWR.
6
Pantera Bitcoin Fund is a long-only non-discretionary hedge fund that invests 100% of
its subscriptions into bitcoin and bitcoin cash. It provides investors with quick, secure access to
large amounts of bitcoin and bitcoin cash — without the burdens of trading and safekeeping
them. See PANTERACAPITAL.COM, https://perma.cc/G388-J89S.
6
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18. Aaron Leibowitz is a citizen of Westchester, New York. During the
relevant time period, Aaron Leibowitz owned bitcoin, bitcoin cash, ether, Waves,
and EOS.
19. Pinchas Goldshtein is a citizen of Miami, Florida. During the relevant
time period, Pinchas Goldhstein owned bitcoin and bitcoin future contracts.
B. Defendants
i. DigFinex
20. Defendant DigFinex Inc. is incorporated in, and a citizen of, the British
Virgin Islands.7 DigFinex operates as the ultimate parent company of the Bitfinex
Defendants (defined below), the Tether Defendants (defined below), and is the
majority owner of iFinex, Inc., and Tether Holdings Limited.8
21. The shareholders of DigFinex are Ludovicus Jan van der Velde,
Giancarlo Devasini, Paolo Ardoino,9 Philip Potter, Stuart Hoegner,10 and Perpetual
Action Group (Asia) Inc.11
7
Exhibit 2, Aff. of Whitehurst ¶ 89 ECF No. 1, James v. iFinex Inc., No. 450545/2019
(N.Y. Sup. Ct. April 25, 2019) (“Whitehurst Affirmation”); Exhibit 3, ECF No. 16, James v.
iFinex (N.Y. Sup. Ct. April 25, 2019) (“DigFinex and iFinex Register of Directors”).
8
Exhibit 2 ¶ 8, 16 (Whitehurst Affirmation); Exhibit 4, Certificate of Interested Entities,
ECF No. 4, iFinex Inc. v. Wells Fargo, No. 3:17-CV-01882 (N.D. Cal. April 5, 2017)
(“Certificate of Interested Entities”).
9
Ardoino is the Chief Technical Officer of both Bitfinex and Tether.
10
Hoegner is the General Counsel of both Bitfinex and Tether.
11
Exhibit 4 (Certificate of Interested Entities).
7
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ii. The Bitfinex Defendants
22. Defendants iFinex Inc., BFXNA Inc., and BFXWW Inc. are owned and
operated by the same small group of executives and employees that together operate
an online platform called “Bitfinex” for exchanging and trading virtual currency.12
Plaintiffs provide more detailed allegations about these Defendants below, but for
ease of reference and unless otherwise noted, this Complaint will refer to these
Defendants collectively as “Bitfinex” or the “Bitfinex Defendants.”
23. Defendant iFinex Inc. is incorporated in, and a citizen of, the British
Virgin Islands.13 iFinex owns and operates the online cryptocurrency exchange
called “Bitfinex” accessible at bitfinex.com.14 It is also the holding company that
wholly owns Defendants BFXNA Inc. and BFXWW Inc.15
24. Defendant BFXNA Inc. is incorporated in, and a citizen of, the British
Virgin Islands.16 It is the entity that interfaces with U.S. customers that want trade
on the Bitfinex exchange.17
12
Exhibit 2 ¶ 10 (Whitehurst Affirmation).
13
Exhibit 2 ¶ 7, (Whitehurst Affirmation); Exhibit 3 (DigFinex and iFinex Register of
Directors).
14
Terms of Service, BITFINEX.COM § 14.5 (July 12, 2019) (“The Site and Services are
owned by iFinex.”), https://perma.cc/4U5J-3MKY.
15
Exhibit 2 ¶ 8, (Whitehurst Affirmation); Exhibit 5, Aff. of Hoegner ¶ 3, ECF No. 78,
James v. iFinex (N.Y. Sup. Ct. May 21, 2019).
16
Exhibit 5 ¶ 3 (Hoegner Affirmation).
17
Terms of Service, BITFINEX.COM, at preamble (July 12, 2019), https://perma.cc/4U5J-
3MKY.
8
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25. Defendant BFXWW Inc. is incorporated in, and a citizen of, the British
Virgin Islands.18 It is the entity that interfaces with non-U.S. customers that want to
trade on the Bitfinex exchange.19
iii. Tether Defendants
26. Defendants Tether Holdings Limited, Tether Limited, Tether
Operations Limited, and Tether International Limited are owned and operated by the
same small group of executives and employees that together operate an enterprise
called “Tether” which is the central authority over, and issuer of, USDT. For ease of
reference and unless otherwise noted, this Complaint refers to these Defendants as
“Tether” or the “Tether Defendants.”
27. Defendant Tether Holdings Limited is incorporated in, and a citizen of,
the British Virgin Islands.20 It is the holding company of Defendants Tether Limited,
Tether Operations Limited, and Tether International Limited.21
18
Exhibit 5 ¶ 3 (Hoegner Affirmation).
19
Terms of Service, BITFINEX.COM, at preamble (July 12, 2019), https://perma.cc/4U5J-
3MKY.
20
Exhibit 2 ¶ 13 (Whitehurst Affirmation); Exhibit 5 ¶ 5 (Hoegner Affirmation)..
21
Id.
9
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28. Defendant Tether Operations Limited appears to be incorporated in,
and a citizen of, the British Virgin Islands.22 It is the entity that interfaces with
Tether’s U.S. customers that want to trade USDT.23
29. Defendant Tether International Limited is incorporated in, and a citizen
of, the British Virgin Islands. 24 It is the entity that interfaces with Tether's non-U.S.
customers that want to trade USDT.25
30. Defendant Tether Limited is incorporated in, and a citizen of, Hong
Kong. 26 Tether Limited is the entity that issues USDT.27
22
Exhibit 6, Tether Operations Limited, LEI-LOOKUP.COM, https://perma.cc/5RGR-9X8E.
While the Office of the New York Attorney General alleged that Tether Operations
Limited and Tether International Limited were incorporated in Hong Kong, Plaintiffs were
unable to identify any corroborating records in the Hong Kong registry.
23
Exhibit 2 ¶ 13 (Whitehurst Affirmation).
24
Exhibit 7, Tether International Limited, LEI-LOOKUP.COM, https://perma.cc/JUR6-
DHZE.
25
Exhibit 2 ¶ 13 (Whitehurst Affirmation).
26
Exhibit 8 (Hong Kong Registry-Tether Limited), https://perma.cc/RDU3-9E7D. Tether
Limited also has a lapsed Legal Entity Identifier (LEI) that incorrectly identifies a different
address in Taiwan as its registered address. Exhibit 9, Tether Limited, LEI-LOOKUP.COM,
https://perma.cc/FLT7-B8L7.
27
Exhibit 10, Tether: Fiat currencies on the Bitcoin blockchain, TETHER.TO at 4 (June
2016) (the “Tether White Paper”), https://perma.cc/HM4V-5B3L.
10
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iv. The Individual DigFinex, Bitfinex, and Tether Defendants
31. Defendant Ludovicus Jan van der Velde28 (“Velde”) is the Chief
Executive Officer of both the Bitfinex and Tether enterprises.29 He has held this
position since early 2013.30 Velde is one of two directors listed on the corporate
registries of DigFinex, iFinex, and Tether Limited.31 Velde is also a shareholder of
DigFinex and Tether Holdings Limited, and is the former CEO of DigFinex
shareholder Perpetual Action Group (Asia).32 Velde is a citizen of the Netherlands.33
32. Defendant Giancarlo Devasini was involved in creating Bitfinex. He is
the Chief Financial Officer of Bitfinex and Tether.34 Devasini is the other director
identified on the corporate registries of DigFinex, iFinex, and Tether Limited.35 He
28
Defendant van der Velde sometimes use the aliases JL, Jan Ludovicus, and Jean-Louis.
29
Bitfinex Leadership – Jean-Louis van der Velde, Chief Executive Officer, BITFINEX.COM
(Mar. 12, 2018), https://perma.cc/3XVL-DNQC.
30
Id.
31
Exhibit 3 (DigFinex and iFinex Register of Directors); Exhibit 8 (Hong Kong Registry-
Tether Limited).
32
Exhibit 4 (Certificate of Interested Entities); Exhibit 11 (LinkedIn page identifying
Velde as former CEO of Perpetual Action Group (Asia)).
33
Exhibit 3 (DigFinex and iFinex Register of Directors).
34
Bitfinex Leadership – Giancarlo Devasini, Chief Financial Officer, BITFINEX.COM (Mar.
12, 2018), https://perma.cc/4B32-XAWZ. Devasini was also the president of Smart Property
Solutions SA, the Swiss company behind Tether’s Euro-backed stablecoin EURT. See Terms of
Service, TETHER.CH (Sep. 10, 2017), https://perma.cc/L77C-BTKP; Exhibit 12, Commercial
Register, SWISS OFFICIAL GAZETTE OF COMMERCE (May 16, 2017), https://perma.cc/7LG6-
QAWX.
35
Exhibit 3 (DigFinex and iFinex Register of Directors); Exhibit 8 (Hong Kong Registry-
Tether Limited).
11
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is also a shareholder of Tether Holdings Limited and DigFinex.36 Devasini is a
citizen of Italy. In the early days of Bitfinex and Tether, Devasini posted under the
username “urwhatuknow” on the bitcointalk.org forum.37
33. Defendant Philip G. Potter was the Chief Strategy Officer of the
Bitfinex and Tether enterprises until June 2018.38 He also was or is a director of
Tether Holdings Limited and a shareholder in DigFinex.39 Potter is a citizen of New
York.40
v. The Crypto Capital Defendants
34. Defendant Crypto Capital Corp. is incorporated in, and citizen of,
Panama.41 Crypto Capital Corp operated as a “payment processor” that marketed
itself to cryptocurrency exchanges.42 In reality, it served as an illegal “shadow bank”
36
Exhibit 4 (Certificate of Interested Entities).
37
See, e.g., Re: [Beta]Bitfinex.com first Bitcoin P2P lending platform for leverage
trading, BITCOINTALK.ORG (April 22, 2013), https://perma.cc/RTL5-GSNS. Bitcointalk.org is an
internet forum dedicated to the discussion of bitcoin and other cryptocurrencies.
38
Anna Irrera, Bitfinex chief strategy officer departs, REUTERS (June 22, 2018),
https://perma.cc/A4Z2-HDYF.
39
Tether Holdings Limited, OFFSHORE LEAKS DATABASE, https://perma.cc/UDT7-
ACVW; Exhibit 4 (Certificate of Interested Entities).
40
Exhibit 13 at 2, ECF No. 95, James v. iFinex (N.Y. Sup. Ct. July 8, 2019) (Feb. 2018
Bank Account Application).
41
Crypto Capital Corp., OPENCORPORATES.COM, https://perma.cc/CX94-QSCU.
42
CRYPTOCAPITAL.CO (Oct. 4, 2019), https://perma.cc/D3CL-HQ6L.
12
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that granted the Bitfinex and Tether enterprises access to the global financial system
without regulatory oversight.
35. Defendant Global Trade Solutions AG is incorporated in, and a citizen
of, Switzerland.43 Global Trade Solutions AG owns and operates Crypto Capital
Corp.44 The Swiss regulatory agency FINMA placed Global Trade Solutions AG on
its public warning list in May 2019.45
36. Defendant Reginald Fowler acted as an employee, agent, or partner of
Defendant Crypto Capital Corp. and Global Trade Solutions AG.46 He is a citizen of
the United States and a resident of Arizona.
37. For ease of reference, organizational charts of certain Defendants and
their various relationships to one another are attached as Exhibit 16.
43
Kanton Zug Commercial Register, ZG.CHREGISTER.CH (Oct. 4, 2019),
https://perma.cc/P8A9-U7QA.
44
CRYPTOCAPITAL.CO (Oct. 4, 2019) (“Crypto Capital is owned and operated by Global
Trade Solutions AG”), https://perma.cc/D3CL-HQ6L.
45
Public Warning List, FINMA.CH, https://perma.cc/HG4N-CPA7. FINMA uses its
warning list to identify “companies and individuals who may be carrying out unauthorized
services and are not supervised by FINMA.” Id., https://perma.cc/W5FD-B8KP.
46
Exhibit 14 at 1, 5, Mem. In Support of Detention, ECF No. 6, United States v. Fowler,
No. 19-9181MJ (D. Ariz. May 1, 2019) (Fowler Memorandum); Exhibit 15 ¶ 8, Superseding
Indictment, ECF No. 7, United States v. Fowler, No. 19-CR-254 (S.D.N.Y. April 30, 2019)
(“Fowler Indictment”); Robert-Jan den Haan, Indictment reveals new clues in the Crypto Capital
situation, YAHOO (May 2, 2019), https://perma.cc/D763-NMYS.
13
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III. JURISDICTION AND VENUE
38. The court has original jurisdiction over the federal claims in this action
pursuant to 28 U.S.C. §§ 1331 and 1337 and 18 U.S.C. § 1964(c).
39. Venue lies within this District under 15 U.S.C. § 22, 18 U.S.C. § 1965,
and 28 U.S.C. § 1391 because Defendants resided, transacted business, were found,
or had agents in this District, and a substantial portion of the alleged activity affected
interstate trade and commerce in this District.
40. During the Class Period,47 Defendants used the instrumentalities of
interstate commerce, including interstate wires, to effectuate their illegal scheme.
41. Defendants’ manipulation, conspiracy, and conduct alleged herein was
in U.S. import commerce and/or had direct, substantial and reasonably foreseeable
effects on U.S. domestic commerce, and such effects give rise to Plaintiffs’ claims,
within the meaning of 15 U.S.C. § 6a.
42. This Court has personal jurisdiction over each Defendant, because each
Defendant transacted business, maintained substantial contacts, and/or they or their
coconspirators committed overt acts in furtherance of their illegal conspiracy, in the
United States, including in this District. The scheme was directed at, and had the
47
The Class Period is defined as the period between Tether’s first USDT issuance
(October 6, 2014) to the present.
14
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intended effect of, causing injury to persons residing in, located in, or doing business
in this District.
43. The Court also has quasi in-rem jurisdiction over the Defendants by
virtue of their U.S. dollar accounts in New York.
IV. FACTUAL ALLEGATIONS
A. Cryptocurrencies and Cryptocurrency Exchanges
44. A cryptocurrency is a digital asset designed to work as a medium of
exchange and/or a store of value. Cryptocurrencies leverage a variety of
cryptographic principles to secure transactions, control the creation of additional
units, and verify the transfer of the underlying digital assets.
45. Bitcoin48 was the world’s first decentralized cryptocurrency. It is also
the largest and most popular cryptocurrency with a market cap of $147 billion as of
October 5, 2019.49 Bitcoin spawned a market of cryptocurrencies that, together with
bitcoin, have a current market cap of $219 billion.
46. At its core, Bitcoin is a ledger that tracks the ownership and transfer of
every bitcoin in existence. This ledger is called the blockchain.
48
The term “bitcoin” can refer to both a computer protocol and a unit of exchange.
Accepted practice is to use the term “Bitcoin” to label the protocol, software, and community,
and the term “bitcoin” to label the units of exchange.
49
https://coinmarketcap.com/.
15
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47. Instead of a bank account number, each bitcoin user has a “public key”
that is the address used to receive bitcoin from others. Every public key can be
readily identified on the Bitcoin blockchain along with the number of bitcoins
associated with that particular public key.
48. There are two methods of acquiring bitcoin.
49. The first is to “mine” it. Because there is no centralized authority that
keeps track of bitcoin spending, the Bitcoin protocol issues new bitcoin to
individuals that expend computing power to update its ledger. This process is called
bitcoin mining.
50. The second is to get it from someone else. Practically, this can be
accomplished by receiving bitcoin as a gift or by purchasing it.
51. Online cryptocurrency exchanges are one place to purchase bitcoin.
Cryptocurrency exchanges are similar to traditional stock or commodities exchanges
in that they provide a convenient marketplace to match buyers and sellers of virtual
currency.
52. Early on, bitcoin was the only cryptocurrency available on exchanges.
As cryptocurrencies grew in popularity, however, exchanges began listing other
cryptocurrencies as well.
53. As the cryptocurrency market grew, trading volumes on exchanges
grew as well. In early 2013, daily bitcoin trading volumes hovered between $1
16
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million and $25 million. By the end of 2017, daily bitcoin trading volumes ranged
between $200 million and $3.8 billion.50
B. Bitfinex
54. Bitfinex was publicly announced in 2013 when its Chief Technology
Officer, Raphael Nicolle, posted about its creation on the popular online
cryptocurrency forum bitcointalk.org.51
55. Bitfinex is now one of the “largest and least regulated” cryptocurrency
exchanges in the world.52 While many exchanges only facilitate crypto-to-crypto
transactions, Bitfinex is one of relatively few that allows users to deposit and
withdraw “fiat currency.”53
56. Bitfinex has made conflicting statements about its operational
locations. Some statements identify its principal place of business as Hong Kong,
50
https://www.blockchain.com/charts/.
51
[BETA]Bitfinex.com first Bitcoin P2P lending platform for leverage trading,
BITCOINTALK.ORG (Oct. 22, 2012), https://perma.cc/XRX7-B22T.
52
Exhibit 17, Nathaniel Popper, Bitcoin’s Price Was Artificially Inflated, Fueling
Skyrocketing Value, Researchers Say, N.Y. TIMES (June 13, 2018), https://perma.cc/U6UV-
KQ3V.
53
Fiat currency is legal tender whose value is backed by the government that issued it,
e.g., dollars or euros.
17
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China.54 Others only identify offices in Taiwan.55 In 2019, Bitfinex’s General
Counsel, swore that “[n]either Bitfinex nor Tether has a single headquarters or home
office. Rather, the Companies have decentralized operations in different countries
including Hong Kong, Switzerland, and Taiwan.”56 Today, Bitfinex’s website
identifies only London and Taiwan locations.57
57. In June 2016, the Commodity Futures Trading Commission (the
“Commission”) fined Bitfinex $75,000 after finding that “Bitfinex engaged in
illegal, off-exchange commodity transactions and failed to register as a futures
commission merchant, in violation of Section 4(a) and 4d of the [Commodity
Exchange] Act.” 58
58. The Commission also found that “[b]itcoin and other virtual currencies
are encompassed in the definition and properly defined as commodities, and are
therefore subject as a commodity to applicable provisions of the [Commodity
Exchange] Act and Regulations.”59
54
Exhibit 18, In re BFXNA Inc., CFTC No. 16-19, 2016 WL 3137612, *1 (June 2, 2016)
(consent order between the CFTC and Bitfinex identifying Hong Kong as its principal place of
business); @Bitfinex, TWITTER (Sep. 5, 2017), https://perma.cc/YKA4-S6U5 (Bitfinex’s official
Twitter account identifying its location as Hong Kong).
55
Exhibit 19, Compl. ¶¶ 6–8, ECF No. 1, iFinex v. Wells Fargo (N.D. Cal. April 5, 2017)
(“Wells Fargo Complaint”).
56
Exhibit 5 ¶ 6 (Hoegner Affirmation) (emphasis added).
57
Bitfinex Privacy Policy, BITFINEX.COM (Aug. 18, 2019), https://perma.cc/ZQ3H-N46Y.
58
Exhibit 18 at 2 (2016 CFTC Order).
59
Id. at 5.
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C. Tether
59. Tether is the entity in control of the cryptocurrency USDT, one of the
first stablecoins. Stablecoins are cryptocurrencies designed to maintain a consistent
value relative to one or more assets such as gold or fiat currency. Unlike the
underlying asset it represents, a stablecoin can be transferred between parties across
borders instantaneously with minimal cost.
60. Stablecoins attempt to address the illiquidity and price volatility in the
cryptocurrency market. Indeed, price volatility is one of the main obstacles to
widespread adoption of cryptocurrencies as a means of exchange and store of
value.60 As a former CEO of Goldman Sachs put it, “Something that moves up and
down 20 percent in a day doesn’t feel like a store of value.”61
61. Unlike bitcoin, USDT cannot be mined. Instead, Tether unilaterally
controls the creation of new USDT.
62. Tether’s beginnings trace back to July 2014, when a startup called
Realcoin claimed it had produced the first stablecoin that would “be backed one-to-
one by a fully auditable reserve of dollars.”62 Realcoin was founded by investor
60
John O. McGinnis & Kyle Roche, Bitcoin: Order Without Law in the Digital Age, 94
IND. L.J. __ (forthcoming 2019), https://ssrn.com/abstract=2929133.
61
Exhibit 20, Dakin Campbell, Blankfein Says It’s Too Soon for a Bitcoin Strategy,
BLOOMBERG (Nov. 30, 2017), https://perma.cc/73SS-WB42.
62
Exhibit 21, Michael J. Casey, Dollar-Backed Digital Currency Aims to Fix Bitcoin’s
Volatility Dilemma, WALL ST. J. (July 8, 2014), https://perma.cc/NX5W-UTYZ.
19
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Brock Pierce,63 its first CEO Reeve Collins, and software engineer Craig Sellars.
According to Collins, by issuing realcoins they were “digitizing the dollar and giving
that digital dollar access to the Bitcoin blockchain.”64
63. Collins stated that realcoins would “be introduced or removed from
circulation depending on whether dollars are being added or redeemed.”65 He also
claimed that Realcoin had already found a “major banking partner,” that it would
“maintain a real-time record of its dollar-based reserves,” and that its “lawyers
[were] working to obtain U.S. money transmitter licenses from those states that
require them.”66
64. In November 2014, Realcoin renamed itself Tether and rebranded
realcoins as “tether” or USDT, the ticker under which the token is listed on
cryptocurrency exchanges around the world.67
63
Pierce is a is an American entrepreneur known for his enthusiasm for cryptocurrencies.
64
Exhibit 21, Dollar-Backed Digital Currency, WALL ST. J. (July 8, 2014),
https://perma.cc/NX5W-UTYZ.
65
Id.
66
Id.
67
Pete Rizzo, Realcoin Rebrands as ‘Tether’ to Avoid Altcoin Association, COINDESK
(Nov. 20, 2014), https://perma.cc/DD89-UPL8.
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65. In September 2014, two months prior to the rebranding, Defendants
Potter and Devasini incorporated Tether Holdings Limited in the British Virgin
Islands.68
66. One month later, on October 6, 2014, Tether issued its first batch of
stablecoins, “printing” 100 USDT — allegedly equivalent to $100.69
67. After the rebranding, Collins reiterated the Realcoin promise. He
publicly asserted “that the number of [USDT] in circulation will always equate to
the dollars in its bank account” and “that there are no pegs or formulas that
complicate the process for its partners.”70 He was unequivocal about the
implications: “When you want to redeem them, we issue you cash.”
68
Tether Holdings Limited, OFFSHORE LEAKS DATABASE, https://perma.cc/UDT7-
ACVW.
69
OMNIEXPLORER.INFO, https://perma.cc/L9ZQ-LPSS.
Tether initially issued USDT on the Omni layer of the Bitcoin blockchain, but over time
began to offer USDT tokens on other networks that included Ethereum, Tron, and EOS.
Issuances can be tracked through the following addresses designated as the Tether Printer for
each network:
Omni (Oct. 6, 2014 – April 24, 2019):
https://www.omniexplorer.info/address/3MbYQMMmSkC3AgWkj9FMo5LsPTW1zBTwXL.
Omni (April 24, 2019 – Present):
https://www.omniexplorer.info/address/32TLn1WLcu8LtfvweLzYUYU6ubc2YV9eZs.
Ethereum (Nov. 28, 2017 – Present):
https://etherscan.io/token/0xdac17f958d2ee523a2206206994597c13d831ec7?a=0xc6cde7c39eb2
f0f0095f41570af89efc2c1ea828.
EOS (July 22, 2019 – Present): https://bloks.io/account/tethertether.
Tron (April 13, 2019 – Present):
https://www.trxplorer.io/address/THPvaUhoh2Qn2y9THCZML3H815hhFhn5YC.
70
Realcoin Rebrands, COINDESK (Nov. 20, 2014), https://perma.cc/DD89-UPL8.
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68. The November 2014 rebranding also announced that Tether had formed
“new partnerships in the bitcoin space, including agreements with Hong Kong-based
bitcoin exchange Bitfinex.”71
69. The November 2014 announcement did not reveal, though, that it was
Devasini and Potter, i.e., Bitfinex’s CFO and CSO, that had created and have
controlled Tether’s holding company since September 2014.72
71
Id.
72
Tether Holdings Limited, OFFSHORE LEAKS DATABASE, https://perma.cc/UDT7-
ACVW.
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70. Nor did it reveal that Velde and Devasini, i.e., Bitfinex’s CEO and CFO,
had similarly incorporated Tether Limited in September and served as its only
directors.73
71. An archived copy of the Tether website from March 2015 identified
Potter and Devasini as “advisors” and did not identify Velde at all.74
72. The fact that the same individuals in control of Bitfinex — a
cryptocurrency exchange — were also secretly in control of Tether — a
cryptocurrency supposedly backed by the U.S. dollar — is concerning even without
the strong evidence of wrongdoing contained herein.
73. This overlapping control structure remained largely concealed from the
general public for over a year until the Paradise Papers leaked in November 2017.75
73
Exhibit 8 (Hong Kong Registry–Tether Limited).
74
Our Team, TETHER.TO (Mar. 29, 2015), https://perma.cc/UC2T-JEJF.
75
Exhibit 22, Nathaniel Popper, Warning Signs About Another Giant Bitcoin Exchange,
N.Y. TIMES (Nov. 21, 2017), https://perma.cc/N33P-WNDG.
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74. Similarly concerning is that USDT is always initially transferred from
Tether’s “treasury wallet” to Bitfinex and not directly to any other exchanges.
75. Tether’s treasury wallet is the account solely controlled by Tether in
which all USDT are created or destroyed. All new USDT are first sent to the Tether
Treasury after being created. Any redeemed USDT must similarly be transferred
back to the Treasury to be “revoked,” i.e. destroyed.76
77
76. Tether’s exclusive relationship with Bitfinex for initial USDT issuances
means that Bitfinex was often Tether’s only customer.78
76
See Exhbit 10 at 8 (Tether White Paper).
77
What is Driving Tether’s Growth and What Financial Institutions Could Learn From
It, CHAINALYSIS (Aug. 2018), available at TETHER.TO, https://perma.cc/4MYT-3F8B.
78
Robert-Jan Den Haan, Clearing Up Misconceptions: This is How Tether Should (and
Does) Work, BITCOIN MAGAZINE (June 14, 2018), https://perma.cc/6J2Q-2U33.
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77. As of this filing, USDT is reportedly the most widely used
cryptocurrency in the world by trading volume, surpassing even bitcoin.79 Bitfinex
and Tether’s Chief Technical Officer recently boasted that USDT possesses a near-
perfect monopoly on the stablecoin market by accounting for 98.7% of worldwide
stablecoin trading volumes.80
78. It is also the fourth largest cryptocurrency in the world, with a market
cap of over $4.1 billion based on the over 4.1 billion USDT in circulation, 81 which
should mean Tether holds over $4.1 billion U.S. dollars on deposit in its bank
accounts.
D. The History of Tether’s 1:1 USDT/USD Guarantee
79. Throughout its existence, Tether has marketed USDT as enabling
traders to move in and out of positions across different cryptocurrencies and different
cryptocurrency exchanges. Its pitch is that USDT’s reliable price coupled with its
digital representation on the blockchain offers the best of both worlds. It is stable
and safe like the U.S. dollar while being easily transferable and divisible like other
cryptocurrencies.
79
Exhibit 23, Olga Kharif, The World’s Most Used Cryptocurrency Isn’t Bitcoin,
Bloomberg (Oct. 1, 2019), https://perma.cc/9A3H-DYT8.
80
Exhibit 24, Olga Kharif, Biggest Crypto Exchange Takes on Tether with Own
Stablecoins, BLOOMBERG (June 5, 2019), https://perma.cc/XNE7-RV78.
81
www.coinmarketcap.com.
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80. USDT’s value was necessarily derived from Tether’s guarantee that
each USDT was backed by one U.S. dollar held in reserve.
81. Up until March 20, 2015, Tether’s website stated that USDT
is backed 100% by actual fiat currency assets in our reserve
account and always maintains a one-to-one ratio with any
currency held. For example, 1 USDT = 1 USD. With almost
zero conversion and transfer fees, [USDT] is redeemable for cash
at any time.82
82. During that same time, Tether’s website also claimed that “Tether
currencies are essentially Dollars, Euros, and Yen formatted to work on the
Blockchain. [USDT]s always hold their value at 1:1 to their underlying assets.” 83
83. On June 17, 2016, Tether released a white paper further assuring the
world that each USDT was backed by actual assets. It promised that:
[E]ach [USDT] in circulation represents one US dollar held in
our reserves (i.e. a one-to-one ratio) which means the system is
fully reserved when the sum of all [USDT] in existence (at any
point in time) is exactly equal to the balance of USD held in our
reserve. 84
84. The white paper also referenced Tether’s commitment to “maintaining
the guarantee of 100% redeemability”85 and it promised that USDT “may be
redeemable/exchangeable for the underlying fiat currency pursuant to Tether
82
Frequently Asked Questions, TETHER.TO (Mar. 20, 2015) (emphasis added),
https://perma.cc/L46W-VCNX.
83
Id.
84
Exhibit 10 at 9 (Tether White Paper).
85
Id. at 17.
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Limited’s terms of service or, if the holder prefers, the equivalent spot value in
Bitcoin.”86
85. Finally, it also included the chart below depicting how USDT are
created when fiat is deposited and then withdrawn from circulation when redeemed
for fiat:87
86. A year later on April 5, 2017, during court proceedings against Wells
Fargo, Velde filed a declaration, under penalty of perjury, explaining that:
Customers who want to purchase Virtual Currency through
Bitfinex must deposit U.S. dollars or [USDT] into their Bitfinex
86
Id. at 4.
87
Id. at 7–8.
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account and in exchange receive an equivalent amount of Virtual
Currency until they ask Bitfinex to remit back the U.S. dollars
they deposited. Likewise, customers who want to purchase
[USDT] through Tether must deposit U.S. dollars in their Tether
account and in exchange receive an equivalent amount of
[USDT] until they ask Tether to remit back the U.S. dollars they
deposited. . . . For these systems to work, customers depend on
Bitfinex’s and Tether’s ability to send back to them the U.S.
dollars they deposited with Bitfinex or Tether.88
87. Until February 2019, Tether’s website continued to represent that every
USDT in circulation was “backed 1-1 by traditional currency held in our reserves.
So 1 USDT is always equivalent to 1 USD.”89
88. On March 4, 2019, with Tether under criminal investigation by the
Department of Justice, the CFTC, and the New York Attorney General, Tether’s
guarantee was altered to instead assert that every USDT was “1-1 pegged to the
dollar” and “100% backed” by reserves that “from time to time may include other
assets.”90
88
Exhibit 25, Decl. of Velde ¶¶ 12, 14, ECF No. 9, iFinex v. Wells Fargo (N.D. Cal.
April 5, 2017) (Velde Declaration).
89
TETHER.TO (Feb. 19, 2019), https://perma.cc/B663-LR72.
90
TETHER.TO (Mar. 04, 2019), https://perma.cc/FWY6-23EP.
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89. As of August 17, 2019, representations that (1) “outstanding [USDT]
are backed 1-to-1 by traditional currency,” that (2) “1 USDT is always equivalent to
1 USD,” and that (3) “users can freely deposit, trade and withdraw USDT” and
“convert[] these to fiat” continued to appear on Bitfinex’s website.
91
92
90. Tether’s counsel represented to the Office of the New York Attorney
General that “issuances of new [USDT] occur when an investor has requested to
purchase [USDT] by depositing U.S. dollars with Tether the company, or by
depositing U.S. dollars with a trading platform that is authorized to accept dollar
deposits in exchange for USDT.”93
91
What are Tethers, BITFINEX.COM (Aug. 17, 2019), https://perma.cc/YAT8-S2P8.
92
Fiat on Bitfinex, BITFINEX.COM (Aug. 17, 2019), https://perma.cc/5NMJ-G4KT.
93
Exhibit 2 ¶ 34 (Whitehurst Affirmation).
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91. In spite of these representations — which have shifted in form, but not
in substance over a period of at least five years — USDT are not backed 1:1 by U.S.
dollars, any other currency, or even “other assets.” As explained in detail below,
Tether’s 1:1 USDT/USD guarantee is a lie that has been leveraged by Tether and
Bitfinex to monopolize the stablecoin market and thereby manipulate the
cryptocurrency market.
E. The Cryptocurrency Market is Susceptible to Manipulation
“Illiquid markets, such as Bitcoin are easy prey to manipulation.”
— Defendant Giancarlo Devasini, Dec. 5, 201294
92. Bitfinex and Tether’s plans were aided, in part, by the inherent price
volatility and lack of regulation in the cryptocurrency market. This volatility has left
the cryptocurrency market highly susceptible to price manipulation.
93. Volatility is caused by a variety of factors, including the fact that
regulatory agencies are still assessing how to best apply existing regulatory
frameworks to this market.
94. Volatility is also due, in part, to the fact that many cryptocurrencies are
commodities, not stocks. They don’t sell products, earn revenue, employ individuals,
or return dividends — qualities that would make them easier to value. And unlike
commonly traded commodities like gold or silver, the cryptocurrency asset class is
94
Re: I forced the 10-day high last night. What do you think about that?,
BITCOINTALK.ORG (Dec. 5, 2012), https://perma.cc/6A6T-Q93F.
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comparatively new and doesn’t have a long trading history to help traders understand
the factors underlying its market demand.
95. Lastly, volatility is caused by the lack of significant price anchors that
come with large scale institutional capital investments.
96. Because these conditions have, to date, created an environment with
significant price volatility, the cryptocurrency market is highly susceptible to price
manipulation.
97. One infamous example of such manipulation took place between 2013
and 2014 and was accomplished with an automated trading program coined the
“Willy Bot.”
98. Automated trading programs like the Willy Bot enable traders to
execute manipulative tactics with precision. These programs are commonly referred
to as “bots.”
99. Between 2013 and 2014, Mark Karpeles, the owner and operator of the
failed cryptocurrency exchange Mt. Gox, implemented the Willy Bot to successfully
manipulate bitcoin’s price from about $150 to over $1,000 in less than 3 months.95
95
Exhibit 26, Neil Gandal et al., Price Manipulation in the Bitcoin Ecosystem, 95 J. OF
MONETARY ECON. 86 (2018), https://perma.cc/A9QN-ZV8N.
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When Mt. Gox finally suspended trading due to its insolvency, the price fell to
$500.96
100. Before its collapse, “Mt. Gox was the biggest trading platform for
bitcoin” and “was handling 70% of all bitcoin trading” worldwide.97 Mark Karpeles
was its sole owner and operator.
101. On May 25, 2014, an anonymous trader posted a report titled, “The
Willy Report: proof of massive fraudulent activity at Mt. Gox and how it has affected
the price of Bitcoin.”98
102. The Willy Report provided detailed analysis of Mt. Gox’s leaked
trading logs and concluded that someone had programmed a bot to buy 10-20 bitcoin
every five to ten minutes. The report concluded that this “enormously” affected the
price of bitcoin and played a key role in its rise to $1,000.99
103. Since then, additional academic research has reached the same
conclusion. In an article published last year, one team found that:
suspicious trading activity of a single actor was the primary cause
of the massive spike in the USD/BTC exchange rate in which the
96
Exhibit 27, Paul Vigna, 5 Things About Mt. Gox’s Crisis, WALL ST. J. (Feb. 25, 2014),
https://perma.cc/A2WH-SXFL.
97
Id.
98
Exhibit 28 (the “Willy Report”), https://perma.cc/EN6E-2HJP.
99
Id.
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rate rose from around $150 to over $1,000 in just two months in
late 2013.100
104. The researchers observed that the “Willy account became active on
September 9, 2013” and continued to trade until their data cutoff on November 30,
2013. Because Karpeles owned and operated the exchange, “Willy” never actually
had to pay for bitcoin, but nonetheless bought “around 268,132 for just under $112
million” during that time period. One passage captures their findings particularly
well:
Separating the days on which Willy was active from those he was
not, reveals a dramatic difference: In the case of Mt. Gox, the
average USD/BTC rate increased by $21.85 on the 50 days Willy
was active; it actually fell (by $0.88 on average) on days when
Willy was not active. The same dramatic difference holds for the
other exchanges as well. These results are striking and suggest
that Willy’s activity could have caused huge jumps in the
exchange rate on all of the exchanges.
100
Exhibit 26, Price Manipulation, 95 J. OF MONETARY ECON. 86 (2018),
https://perma.cc/A9QN-ZV8N.
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105. While it was initially unclear who controlled the Willy Bot, Karpeles
eventually admitted to controlling it at his trial in 2017.101
106. The Willy Bot scheme underscores how control over an exchange and
the opportunity to make trades with non-existent money allowed a single individual
to dramatically influence cryptocurrency prices, even without sophisticated
manipulation tactics like wash trading, match trading, and spoofing. The simple
power to acquire cryptocurrencies with non-existent U.S. dollars interferes with the
natural price discovery process and misleads market participants.
F. How Tether and Bitfinex Caused the 2017-18 Bitcoin Bubble
This is going to be the largest bubble of our lifetimes. . .
You can make a whole lot of money on the way up, and we plan on it.
—Michael Novogratz, September 26, 2017 102
107. Bitfinex and Tether leveraged USDT and their control of the Bitfinex
exchange to inflate one of the largest bubbles in history.
108. From 2014 to 2016, bitcoin’s price fluctuated between $200 and $800.
By the end of 2016, bitcoin — as well as other cryptocurrencies — began to see
significant gains.
101
William Suberg, Mt. Gox Trial Update: Karpeles Admits ‘Willy Bot’ Existence,
COINTELEGRAPH (July 11, 2017), https://perma.cc/5FMC-SJYM.
102
Exhibit 29, Erik Schatzker, A Crypto Fund King Says Bitcoin Will Be the Biggest
Bubble Ever, BLOOMBERG (Sep. 26, 2017), https://perma.cc/T3PK-RJL2. Novogratz is the CEO
of Galaxy Digital, a New York based cryptocurrency investment firm. The NYAG investigation
into Tether and Bitfinex revealed correspondence between Bitfinex and Galaxy Digital to
onboard Galaxy as a customer of Bitfinex in October 2018.
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109. On March 1, 2017, the price of bitcoin had climbed to $1,200.
Throughout the first half of 2017, bitcoin continued to experience significant gains,
rising to just above $2,000 by July.103
110. From there, bitcoin’s price rose rapidly until, on December 17, 2017, it
reached a record high of nearly $20,000. By then, bitcoin’s market cap was nearly
$327 billion, roughly the size of Amazon’s market cap during the same period.
111. Then the market crashed.
112. Between January and February 2018, bitcoin’s price fell to $6,200. The
bitcoin market continued to hemorrhage throughout 2018. Roughly one year from
its previous high, bitcoin’s market cap was only $62 billion, or $3,500 per bitcoin.
113. The disappearance of $265 billion in bitcoin wealth was the result of
Bitfinex and Tether propping and popping the largest bubble in history.
103
www.coinmarketcap.com.
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114. The chart below conveys the scale of this event by comparing bitcoin’s
relative price inflation with other infamous bubbles.104
115. The economic devastation was not confined to bitcoin. As bitcoin fell,
so did the rest of the cryptocurrency market it had spawned. “The combined market
capitalization of all virtual currencies as of January 6, 2018, was roughly $795
billion; by Feb. 6, 2018, the total value had dropped to $329 billion.” CFTC v.
McDonnell, 287 F. Supp. 3d 213, 219 (E.D.N.Y. 2018).
104
Exhibit 1, Did Bitcoin Just Burst?, BLOOMBERG (Jan. 17, 2018),
https://perma.cc/DL4Z-6JDQ.
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116. As explained below, USDT was not backed 1:1 by U.S. dollars.
Bitfinex and Tether issued billions of unbacked USDT to manipulate the price of
bitcoin and other cryptocurrencies.
117. This scheme enabled Bitfinex and Tether to buy massive amounts of
bitcoin without paying for it — just like Karpeles in 2013-2014 — and profit
outrageously from the boom-and-bust cycles they created.
i. Professor Griffin’s analysis demonstrates Tether and Bitfinex
manipulated the price of bitcoin
118. In June 2018, Professor John Griffin and Amin Shams published an
analysis of USDT issuances on SSRN entitled Is Bitcoin Really Un-Tethered
(hereinafter the “Griffin Article”).105
119. The Griffin Article’s main conclusion was that USDT-driven price
manipulation of bitcoin accounted for as much as half of bitcoin’s price gains during
the period of March 1, 2017 through March 31, 2018.
120. The Griffin article examined two alternative hypotheses to explain how
Tether issued USDT during this time frame.
121. The first hypothesis was that Tether issued USDT in response to
legitimate demand for a pegged digital currency. Under this hypothesis, USDT is
105
John Griffin is the James A. Elkins Centennial Chair in Finance at McCombs School
of Business at the University of Texas at Austin. He is a leading expert in Forensic Finance. The
Griffin Article is attached as Exhibit 30, https://ssrn.com/abstract=3195066. As of the time of
this filing, the Griffin Article has the 49th most downloads on SSRN.
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fully backed by U.S. dollars. This hypothesis is called the “pulled hypothesis,”
because investors are “pulling” USDT into the market.106
122. The alternative hypothesis is that Tether issues USDT as part of a
supply-driven scheme to manipulate the price of bitcoin by purchasing it with
unbacked USDT.107 This hypothesis is called the “pushed hypothesis” because
Tether is issuing USDT independently of demand and “pushing” it into the market.
123. Since Tether controls USDT issuance, Bitfinex and Tether can set
strategic price floors for bitcoin that trigger buy orders executed with unbacked
USDT and costlessly ensure the price of bitcoin never falls below the pre-determined
floor.108 Like the Willy Bot, the persistent purchases would result in significant price
increases over the long-term.
124. Large USDT issuances and bitcoin purchases would normally have an
inflationary effect that decreases the relative value of USDT relative to bitcoin, but
the reserve guarantee enforces a floor on USDT prices, which causes bitcoin’s price
to increase relative to the U.S. dollar.109 Thus, the issuance of USDT signals an
artificial demand for bitcoin to the market.
106
Exhibit 30 at 10 (Griffin Article).
107
Id.
108
Id. at 11.
109
Id.
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125. Under the pushed scheme, as bitcoin’s price rises, Bitfinex and Tether
can cash out by selling the bitcoin they’ve acquired for U.S. dollars, likely at a slower
pace and on opaque channels with less price impact than their initial buying
patterns.110
126. In other words, Tether and Bitfinex purchase bitcoin with fake USDT
to draw in momentum investors then cash out by selling it to them for real U.S.
dollars.
127. If anyone ever asks questions, Tether can convert cryptocurrencies to
U.S. dollars or use its U.S. dollar profits to retroactively provide reserves for USDT
and claim those reserves were there all along.111
128. To determine which hypotheses was valid, Griffin examined over 200
gigabytes of transactional data from over ten different sources.112 The public nature
of the blockchain meant that Griffin was able to analyze a significant amount of
USDT transactions to date, including issuances.
110
Id.
111
Id.
112
Id. at 12.
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129. Griffin first confirmed that Tether sends all new USDT to Bitfinex, and
that Bitfinex largely sends USDT to two other exchanges: Poloniex and Bittrex.113
For example, by February 2018 Bitfinex had sent Poloniex 2.99 billion USDT.114
130. Griffin next determined that when bitcoin prices decreased, USDT was
issued and used to purchase bitcoin, but that this was not mirrored by redemptions
when bitcoin prices were increasing.115 He concluded that this indicated USDT was
used to fend off downturns in bitcoin prices rather than benign market making
activities.
131. In other words, Tether and Bitfinex buy bitcoin with USDT when prices
drop to keep the price artificially high.
132. Griffin next analyzed Tether issuances between March 1, 2017 to
March 31, 2018 to test how strongly these issuances correlated with bitcoin price
increases.116 He found that the timing of these issuances strongly correlated with half
of all bitcoin price increases that year.
133. Griffin concluded his findings were “most consistent with the supply-
driven manipulation hypothesis” that Tether was pushing USDT into the market.117
113
Id. at 16.
114
Id. at 17.
115
Id. at 20.
116
Id. at 23.
117
Id. at 26.
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134. As Griffin explained in an interview with Bloomberg:
First, [USDT] are created by the parent company Tether Ltd.,
often in large chunks such as 200 million. Almost all new coins
then move to Bitfinex. When Bitcoin prices drop soon after the
issuance, [USDT] at Bitfinex and other exchanges are used to
buy Bitcoin in a coordinated way that drives the price.118
135. The chart below depicts this correlation between USDT issuances and
bitcoin price increases:
Bitcoin Price and Tether Issuance 2016 - 2019
25000 250000000
20000 200000000
15000 150000000
10000 100000000
5000 50000000
0 0
27-Nov-16
28-Dec-16
28-Jan-17
28-Feb-17
2-Sep-17
3-Nov-17
4-Dec-17
4-Jan-18
4-Feb-18
9-Sep-18
10-Nov-18
11-Dec-18
11-Jan-19
11-Feb-19
27-Oct-16
31-Mar-17
1-May-17
1-Jun-17
2-Jul-17
2-Aug-17
3-Oct-17
7-Mar-18
7-Apr-18
8-May-18
8-Jun-18
9-Jul-18
9-Aug-18
10-Oct-18
14-Mar-19
14-Apr-19
15-May-19
15-Jun-19
16-Jul-19
-5000 -50000000
-10000 -1E+08
Tether Issuance Price of Bitcoin
136. Griffin also observed evidence consistent with the use of “round-
number thresholds” as “price anchors to set a price floor” in order “to stabilize and
drive up the price” of bitcoin. The premise of a price anchor is that “if investors can
demonstrate a price floor, then they can induce other traders to purchase.”119
118
Exhibit 31, Matt Robinson & Matthew Leising, Tether Used to Manipulate Price of
Bitcoin During 2017 Peak: New Study, BLOOMBERG (June 13, 2018), https://perma.cc/5KXS-
RMT5.
119
Exhibit 30 at 5 (Griffin Article).
41
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ii. Other studies corroborate the Griffin Article’s conclusions
137. A few months prior to the publication of the Griffin Article, a report
with the title “Quantifying the Effect of Tether” (the “Tether Report”) was published
online.120 Similar to Griffin’s analysis, the Tether Report concluded that “Tether
printing moves the market appreciably; 48.8% of BTC’s price rise in the period
studied occurred in the two-hour periods following the arrival of 91 different Tether
grants to the Bitfinex wallet.” The report warned that the “Bitfinex
withdrawal/deposit statistics are unusual and would give rise to further scrutiny in a
typical accounting environment.”121
138. In its analysis of bitcoin price data and USDT transactions, the report
found that:
The price data suggests that Tether may not be minted
independently of Bitcoin price and may be created when Bitcoin
is falling; it also rejects the notion that Tether is not having a great
influence on the Bitcoin price. One interpretation of the data
suggests that Tether could account for nearly half of Bitcoin’s
price rise, not even allowing for follow-on effects and the
psychological effects of rallying the market repeatedly. The
transaction data could trigger extreme scrutiny and audits due to
a questionable pattern of transactions.122
120
Exhibit 32 (the “Tether Report”), https://perma.cc/6RV2-KLYR.
121
Id.
122
Id.
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139. On October 3, 2019, TokenAnalyst, a cryptocurrency researching
company “on a mission to bring transparency to the decentralized economy,” 123
similarly concluded that Tether’s issuance of USDT correlated with upward bitcoin
price movement.124
140. TokenAnalyst analyzed the “relationship between $BTC price and
$USDT supply over the course of history” and determined that “on days where
#USDT ERC20 is minted, 70.0% of the time the price of BTC moves up” and “on
days where #USDT Omni is minted, 50.0% of the time the price of BTC moves
up.”125
141. In July of 2018, Dr. Gerard Martinez reviewed the Griffin Article.126
After walking through the relevant evidence, Dr. Martinez concluded that the
“statistics support the theory that Tether Limited and Bitfinex corporations used
Tether to buy Bitcoin in key occasions during the meteoric rise of Bitcoin prices of
2017 and beginnings of 2018”; that “[t]hese corporations would print Tether right
123
TOKENANALYST.IO, https://perma.cc/QS5K-5CWP.
124
Exhibit 33, Olga Kharif, Bitcoin Gains Correlate with Tether Issuance, Researcher
Says, BLOOMBERG (Oct. 3, 2019), https://perma.cc/CWU4-ZXHP.
125
@theokenanalyst, Twitter (Oct. 3, 2019), https://perma.cc/4T66-6LH7. Tether issues
USDT by notating its issuance on either the Omni layer of the Bitcoin blockchain or on the
Ethereum blockchain as an ERC20 token.
126
Dr. Gerard Martinez, MEDIUM (July 12, 2018), https://perma.cc/4QW2-FJPQ (“The
ideas and analysis methods of this article are not new, they are all taken from or inspired by the
recently published paper “Is Bitcoin Really Un-Tethered?” by John M. Griffin et al. and the so-
called Tether Report. However, the results shown here are probably the currently most updated on
the internet and, hopefully, a bit easier to understand than the cited publications.”)
43
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after transient Bitcoin price dips . . .”; that “Tether Ltd. would then buy Bitcoin with
the freshly minted Tether and would promote the creation of a fraudulent bullish
market, which would attract more investors to buy Bitcoin, contributing this way to
increase the bubble (momentum effect)”; and then as the penultimate “part of the
strategy . . . Tether Ltd. would send the freshly bought Bitcoin to their accounts in
Bitfinex.”127
iii. Further evidence of Bitfinex and Tether’s scheme
142. These empirical conclusions are reinforced by other evidence
demonstrating that Bitfinex and Tether actively engaged in coordinated market
manipulation.
143. For example, in April 2017, Potter publicly discussed Bitfinex’s plans
to create a “private market for the equity [shareholders] to trade among
themselves.”128 Bitfinex today “offer[s] an order type called ‘hidden,’ in which the
‘hidden’ order does not appear on the publicly visible order book.”129 These are
precisely the sort of “opaque channel” hypothesized by Griffin as a mechanism for
selling off bitcoin without crashing the price.
127
Id.
128
WhalePool, CSO Bitfinex Phil Potter and WhalePool bitcoin traders celebrate BFX
Token 100% Payment apr/2017, YOUTUBE, at 10:10 (April 3, 2017),
https://archive.org/details/2017.04.03.whalepoolcsobitfinexphilpotter.
129
Virtual Markets Integrity Initiative Report, OFFICE OF THE N.Y. ATT’Y GEN. (Sep. 18,
2018), https://virtualmarkets.ag.ny.gov/. [https://perma.cc/7YS8-LS7S]
44
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144. This hidden market is entirely consistent with a report published by the
New York Attorney General finding that Bitfinex fosters an environment ripe for
abuse. Despite the fact that “[t]rading by platform employees poses a conflict of
interest,” Bitfinex does “not provide any restrictions on employee trading.”130
145. Furthermore, in June 2014, one month after the “Willy Report” about
Mt. Gox was published, Devasini all but admitted that he was working on a “Willy
Bot” of his own to drive the price of bitcoin to $10,000:
131
146. The ability to implement a trading bot like the Willy Bot is corroborated
by a report from the New York Attorney General finding that Bitfinex offers a
number of “special order types” that “are only useful to professional, automated
traders using sophisticated algorithmic strategies, where orders can be submitted and
130
Virtual Markets Integrity Initiative Report, https://virtualmarkets.ag.ny.gov/.
131
Re: And we have another Bitfinex Hookey THIEVING Short Squeeze!,
BITCOINTALK.ORG (June 22, 2014), https://perma.cc/HW9Q-5JVA.
45
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cancelled automatically, in response to market signals not visible (or even available)
to regular traders.”132
147. As described more below (see infra Part IV.G), Bitfinex and Tether’s
purported ability to issue hundreds of millions of USDT at the same time their
longtime banking relationships and U.S. correspondent account access were
terminated is equally alarming.
148. Indeed, in the midst of this liquidity crisis, Devasini virtually admitted
to manipulating the price of bitcoin. In October 2018, Devasini wrote to a Crypto
Capital representative: “please understand all this could be extremely dangerous for
everybody, the entire crypto community . . . [bitcoin] could tank to below 1k if we don’t
act quickly.”133
149. In other words, Tether ran its printing press to issue an asset supposedly
backed by U.S. dollars at a time it was losing access to U.S. dollar clearing. This
makes no sense unless Tether issued unbacked USDT despite its 1:1 guarantee.
150. Further corroboration that USDT is being issued without any real
controls in place is demonstrated by the fact that on July 13, 2019, Tether
132
Virtual Markets Integrity Initiative Report, https://virtualmarkets.ag.ny.gov/. In
particular, Bitfinex offers “‘Fill-or-Kill,’ in which the order is canceled in its entirety if it does not
execute immediately and in full” and “Post-Only’ (also known as ‘Maker-or-Cancel’), in which
the order only posts to the order book if it would not fill an already-posted order.”
133
Exhibit 34, ECF No. 100, James v. iFinex, Inc. (N.Y. Sup. Ct. July 8, 2019) (chat
transcript between Devasini and New York trading client in late 2018 and early 2019).
46
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accidentally issued 5,000,000,000 USDT, and then revoked it in the span of just
twenty minutes. Chief Technical Officer Ardoino attributed this to “an issue with
the token decimals.”134
151. On October 15, 2018, the market registered concern that Tether did not
have the full reserves it claimed. 135 A massive sell-off caused the price of USDT to
drop as low as $0.85.
152. On November 20, 2018, Bloomberg reported that the DOJ’s criminal
probe was coordinating with the CFTC and that “among the issues the Justice
Department is examining is how Tether Ltd. creates new coins and why they enter
the market predominantly through Bitfinex.”136
153. On November 27, 2018, the New York OAG subpoenaed Bitfinex and
Tether.137
154. The DOJ’s criminal probe focused on Bitfinex and Tether to determine
if the 2017 cryptocurrency rally was “fueled in part by manipulation.”138
134
@paoloardoino, TWITTER (July 13, 2019), https://perma.cc/PQT8-RND7.
135
Exhibit 35, Andrea Tan, Eric Lam, & Benjamin Robertson, Crypto Markets Roiled as
Traders Question Tether’s Dollar Peg, Bloomberg (Oct. 15, 2018), https://perma.cc/VT5T-
LWJW.
136
Exhibit 36, Matt Robinson & Tom Schoenberg, Bitcoin-Rigging Criminal Probe
Focused on Tie to Tether, BLOOMBERG (Nov. 20, 2018), https://perma.cc/E28G-4MCM.
137
Exhibit 37, ECF No. 8, James v. iFinex, Inc. (N.Y. Sup. Ct. April 25, 2019) (Bitfinex
subpoena); Exhibit 38, ECF No. 10, James v. iFinex, Inc. (N.Y. Sup. Ct. April 25, 2019) (Tether
subpoena).
138
Exhibit 36, Bitcoin-Rigging Criminal Probe Focused on Tie to Tether, BLOOMBERG
(Nov. 20, 2018), https://perma.cc/E28G-4MCM.
47
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155. The issuance of USDT for price manipulation appears to have
continued to the present day. The chart below depicts the strong correlation between
USDT issuance and an uptick in 2019 bitcoin prices.139
G. How Bank Fraud and Money Laundering with Crypto Capital Made
Price Manipulation of the Cryptocurrency Market Possible
Being in the bitcoin business is really about playing cat and mouse with the correspondent
banks. The problem with becoming big . . . is that we can’t fly under the radar anymore.
—Philip Potter, Bitfinex CSO140
156. As described below, access to the U.S. financial system was an essential
component of Defendants’ scheme. Indeed, the entire premise of Tether depends on
139
Exhibit 33, Bitcoin Gains Correlate with Tether, BLOOMBERG (Oct. 3, 2019),
https://perma.cc/CWU4-ZXHP.
140
WhalePool Interview: Bitfinex CSO Comments on Litigation Withdraw[a]l against
Wells Fargo apr/2017, YOUTUBE at 13:55 (April 12, 2017),
https://archive.org/details/2017.04.12whalepoolbitfinexcsocomments.
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its use of the U.S. financial system — i.e. U.S. dollar deposits — to back its
manufactured digital assets.
157. To facilitate its access to U.S. dollars, Bitfinex and Tether partnered
with a Panamanian entity named Crypto Capital Corp.
158. As conventional banks began shutting Tether and Bitfinex accounts
down for money laundering and other compliance issues, Tether and Bitfinex
became even more enmeshed with Crypto Capital and a complicated shell game of
money laundering.
159. Inexplicably, in the face of this growing pressure, Tether kept its
printing presses hot. Indeed, it often issued large amounts of USDT right as it lost
access to U.S. dollar banking relationships.
160. By early 2018, Crypto Capital was purportedly in control of over $1
billion of Bitfinex funds without a single written agreement having existed over their
four-year business partnership.141
161. Much of the conduct described below is criminal. The crimes
committed by Tether, Bitfinex, Crypto Capital, and their executives include Bank
Fraud (18 U.S.C. § 1344), Money Laundering (18 U.S.C. § 1956); Monetary
Transactions Derived From Specified Unlawful Activities (18 U.S.C. § 1957),
141
Exhibit 2 ¶¶ 58–59 (Whitehurst Affirmation).
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Operating an Unlicensed Money Transmitting Business (18 U.S.C. 1960), and Wire
Fraud (18 U.S.C. § 1343).
162. Indeed, Bitfinex and Tether executives publicly discussed violating
many of these laws in the past and expressed their intent to continue doing so in the
future.
i. Overview of U.S. correspondent banking
163. To engage in U.S. dollar transactions, Bitfinex and Tether required
either (1) a U.S. bank account or (2) an account with a bank that maintains its own
“correspondent account” with a U.S. bank. In the second scenario, the correspondent
account serves as an intermediary and “clears” the U.S. dollar transaction.
164. Money never actually “moves” in cross-border transactions. In order to
facilitate transfers in other currencies, banks maintain “correspondent accounts” at
foreign banks. “Typically, foreign banks are unable to maintain branch offices in the
United States and therefore maintain an account at a United States bank to effect
dollar transactions.”142
165. To send a cross-border transaction in U.S. dollars, a series of bank
accounts are credited or debited accordingly. The graphic below depicts a typical
U.S. dollar transaction in which
142
Sigmoil Resources, N.V. v. Pan Ocean Oil Corp. (Nigeria), 234 A.D.2d 103, 104, 650
N.Y.S.2d 726, 727 (1st Dep’t 1996).
50
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(1) Bitfinex instructs its bank to wire U.S. dollars to a
customer located in the United Kingdom;
(2) the Taiwanese bank debits Bitfinex’s account and
instructs its U.S. correspondent to process the
transaction;
(3) the U.K. correspondent is instructed to debit the
account of the Taiwanese correspondent and credit the
account of the U.K. bank;
(4) the U.K. bank is instructed to credit the customer’s
account;
(5) the U.K. customer gains access to the funds.
166. Access to a U.S. correspondent account is essential to international
transactions in U.S. dollars.143
167. For the correspondent bank, these transactions are riskier from an anti-
money laundering perspective because the originator and beneficiary are one step
143
See Correspondent banking, COMMITTEE ON PAYMENTS AND MARKET
INFRASTRUCTURES, BANK FOR INTERNATIONAL SETTLEMENTS, at 9 (July 2016) (“On a cross-
border level, however, correspondent banking is essential for customer payments and for the
access of banks themselves to foreign financial systems for services and products that may not be
available in the banks’ own jurisdictions.”), https://perma.cc/9Z92-KSU6.
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removed from the bank. Money launderers often capitalize on this disconnect by
using shell companies to obscure the true counterparties even more.”144
168. This is hardly a secret. The FBI recently told Congress that the
“pervasive use of shell companies, front companies, nominees, or other means to
conceal the true beneficial owners of assets is a significant loophole in this country’s
anti-money laundering (AML) regime.”145
ii. U.S. correspondent banking is essential to Bitfinex and Tether
169. Because Bitfinex and Tether needed to accept U.S dollars, convert
illicit gains into U.S. dollars, as well as honor customer withdrawal requests for U.S.
dollars, access to U.S. correspondent banking was critical to the Defendants’
manipulation scheme.
170. In fact, as of April 2017, Bitfinex and Tether told a U.S. federal court
that U.S. dollar transactions were the only types of transactions they engaged in with
customers: “Bitfinex can receive or remit only U.S. dollars for customers’ purchase
of Virtual Currency” and that “Tether can receive or remit only U.S. dollars for
customers’ purchases.”146
144
Exhibit 39, Alexander Weber, et al., Money to Launder? Here’s How (Hint: Find a
Bank), BLOOMBERG (Mar. 9, 2019), https://perma.cc/DXP4-FHXX.
145
Statement of Acting Deputy Asst. Director, CID, FBI to Senate Committee on
Banking, Housing, and Urban Affairs, Combating Illicit Financing by Anonymous Shell
Companies (May 21, 2019), https://perma.cc/P2W9-URMT.
146
Exhibit 19 ¶¶ 17–18 (Wells Fargo Complaint).
52
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171. The Bitfinex and Tether Defendants made these statements in a lawsuit
they filed against Wells Fargo when it terminated its correspondent banking services.
172. Statements made by Bitfinex and Tether in that lawsuit underscore just
how essential U.S. correspondent access was to their operations and how losing it
should have stopped their ability to operate and issue USDT. Specifically, they stated
that Wells Fargo’s “decision to suspend outgoing wire transfers in U.S. dollars from
plaintiffs’ correspondent accounts presented an existential threat to their
businesses,” and that if they “could not remit to customers U.S. dollars that belong
to their customers, [their] businesses would be crippled” and “brought to a
standstill.”147
173. On or around November 28, 2017, Phil Potter opened new business
accounts for DigFinex and iFinex at the New York Branch of Metropolitan
Commercial Bank.148 On December 20, 2017, Potter opened another new account at
the New York Branch of Metropolitan Bank on behalf of Tether Holdings Limited.149
On or around February 16, 2018, Potter opened more new accounts at the New York
branch of Signature Bank on behalf of DigFinex and iFinex.150
147
Id. ¶ 47.
148
Exhibit 40, ECF No. 94, James v. iFinex (N.Y. Sup. Ct. July 8, 2019) (Dec. 2017
Bank Account Application).
149
Id.
150
Exhibit 13 (Feb. 2018 Bank Account Application).
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174. These accounts demonstrate Bitfinex and Tether’s dependency on the
U.S. banking system and on New York banks in particular.
175. But as explained below, these specific accounts were not viable for the
Defendants’ general operations. This was either because the banks could not provide
the necessary correspondent banking services, or perhaps because a history of
account closures had caused Bitfinex and Tether to no longer even attempt to operate
their business openly through regulated banks for fear the accounts would be shut
down.
iii. Bitfinex and Tether’s cat and mouse games
176. Early on, Bitfinex and Tether utilized Taiwanese banks that maintained
U.S. correspondent accounts at Wells Fargo.151
177. On March 31, 2017, Wells Fargo stopped providing correspondent
banking services for Bitfinex and Tether.152
178. Two weeks after being cut off by Wells Fargo, on April 12, 2017, Potter
told the cryptocurrency trading community WhalePool that “it was getting harder
and harder to move money around.”153
151
Exhibit 19 ¶¶ 31–33 (Wells Fargo Complaint).
152
Id. ¶¶ 40-41.
153
WhalePool Interview: Bitfinex CSO Comments on Litigation Withdraw[a]l against
Wells Fargo apr/2017, YOUTUBE at 6:40 (April 12, 2017),
https://archive.org/details/2017.04.12whalepoolbitfinexcsocomments.
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179. Potter went on to explain that everybody banking offshore is “in some
sort of don’t ask don’t tell relationship with their banks,”154 and that U.S. banks were
exiting the dollar clearing business because many “banks have been held
accountable for their actions as correspondents in a lot of other money laundering
and criminal cases” and that “money laundering is their biggest concern.”155
180. Potter clarified, though, that “the problem here [wa]s not really Wells
Fargo. It is the system.”156 He then described Bitfinex’s past efforts to evade the
“system” of money laundering laws banks are required to comply with, and
expressed Bitfinex’s commitment to evading them in the future:
There are other correspondent banks that won’t do business with
us, Wells Fargo just happens to be the last one available to us
with our banks in Taiwan. . .157
We have a lot of other tricks. Being in the bitcoin business is
really about playing cat and mouse with the correspondent banks.
It’s always been that. The problem with becoming big, and also
we have massive balances at the banks, is that [Bitfinex] can’t
fly under the radar anymore. . . .
Right now in Taiwan there is a moratorium . . . on banks opening
up new offshore accounts. That’s an example. Even if we wanted
to register some new corporate entities, move some money
around, things that we would normally do, all that is slowed
down right now. 158
154
Id. at 30:30.
155
Id. at 9:20.
156
Id. at 11:00.
157
Id. at 11:15.
158
Id. at 13:55.
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181. In another discussion from the same time period, Potter said:
We’ve had banking hiccups in the past, we’ve just always been
able to route around it or deal with it, open up new accounts, or
what have you… shift to a new corporate entity, lots of cat and
mouse tricks that everyone in Bitcoin industry has to avail
themselves of.159
182. One way the Defendants attempted to conceal from banks and
regulators the true risk profile of their transactions was by using a Hong Kong
company they had incorporated, Renrenbee Limited, to create the illusion of
compliance with anti-money laundering laws.
183. But Renrenbee Limited was initially incorporated as Bitfinex Limited
in March 2013.160 At that time, Velde was listed as a director, and Devasini became
a director by December 2013.
184. But in April 2014, Bitfinex Limited was renamed Renrenbee Limited
and registered as a Money Services Operator (MSO) in Hong Kong in order to
reassure Bitfinex customers without revealing to banks that Bitfinex was the true
counterparty. 161
159
Bitfinex Tether Phil Potter 'Solved' Banking Problems with illegal money laundering
tactics, YOUTUBE (April 24, 2017), https://archive.org/details/2017.04.24bitfinextetherphilpotter.
160
Exhibit 41 (Hong Kong Registry-Renrenbee Limited), https://perma.cc/4CUU-JY72.
161
Re: [OFFICIAL]Bitfinex.com first Bitcoin P2P lending platform for leverage trading,
BITCOINTALK.ORG (Nov. 10, 2014) (Devasini instructing customer inquiring about to “look for
Renrenbee Limited” in the registry), https://perma.cc/TV5D-RRW3.
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185. By January 2016, the Defendants had even established a separate
website for Renrenbee Limited to reinforce their sham that it was an independent
entity.162
186. This deception continued when the Tether White Paper was published
in June 2016 where Tether falsely represented that it “was concluding a principal-
agency agreement with RenRenBee Limited” whereby Renrenbee would “provide
anti-money laundering compliance work and customer due diligence procedures as
agent for Tether as principal.”163
187. Bitfinex also falsely held Renrenbee Limited out as an independent
provider of compliance services. Even though Renrenbee Limited no longer exists,
to this day the Know-Your-Customer (KYC) form on Bitfinex’s website represents
that “KYC/AML collection and processing is handled for Bitfinex by the appointed
money service operator Renrenbee Ltd.”164
188. The sham nature of Renrenbee’s compliance function is further
corroborated by the fact that Bitfinex and Tether do not observe standard KYC and
AML practices. According to the New York Attorney General, unlike most
exchanges, Bitfinex does not “require customers to submit a range of personal
162
RENRENBEE.COM (Jan. 15, 2016), https://perma.cc/7YJS-PP7E.
163
Exhibit 10 at 18 (Tether White Paper).
164
Exhibit 42 (Bitfinex KYC Form), https://perma.cc/TDM3-UXFR.
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identifying information and government-issued identification before allowing new
customers to trade” and only requires “little more than an email address to begin
trading virtual currencies.”165
189. To further facilitate their cat and mouse games, Bitfinex and Tether
regularly open and use bank accounts in the name of shell companies to conceal their
connection to transactions.
190. On or around January 26, 2018, Bitfinex began instructing customers
to deposit funds in an account held in the name of a different company, Haparc B.V.,
at a different bank, ING Groep NV in the Netherlands.166 ING closed this account
one month later after Bloomberg reported its existence.167
191. In October 2018, Bitfinex began using a Hong Kong bank account held
in the name of a company called “Prosperity Revenue Merchandising Limited” to
engage in U.S. dollar transactions routed through a U.S. correspondent account at
Citibank.168
165
Virtual Markets Integrity Initiative Report, https://virtualmarkets.ag.ny.gov/.
166
Robert-Jan den Haan, The Bitfinex IEO, how did we get here?, THEBLOCK (May 8,
2019), https://perma.cc/F493-P375.
167
Exhibit 43, Ruben Munsterman & Matthew Leising, Digital Exchange Bitfinex, Under
U.S. Scrutiny, Gets ING Account, BLOOMBERG (Feb. 20, 2018), https://perma.cc/4RHP-X4RF.
168
Bitfinex appears to have moved its business to a Hong Kong bank, THE BLOCK (Oct.
16, 2018), https://perma.cc/HJX7-76BH.
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iv. Bitfinex and Tether’s dependence on Crypto Capital to further
obfuscate, avoid money laundering laws, and continue operating
192. Bitfinex and Tether have worked with Defendant Crypto Capital Corp.
as a “third party payment processor” since 2014 without any contract or written
agreement.169
193. Despite the lack of any documented agreement, “by 2018 Bitfinex had
placed over one billion dollars of co-mingled customer and corporate funds with
Crypto Capital.”170
194. Evidence from the end of 2017 through 2018 reveals Bitfinex and
Tether’s questionable banking practices and its desperate need to access the U.S.
banking system.
195. On December 5, 2017, Bloomberg published a story about Tether’s
refusal to disclose the location of its cash reserves without a non-disclosure
agreement in place.171 This same article reported that online documents showed
Bitfinex was directing prospective customers to deposit funds in an account that
169
Exhibit 2 ¶¶ 58–59 (Whitehurst Affirmation). The defendants’ counsel also explained
to the OAG that “Bitfinex and Tether have also used a number of other third party "payment
processors" to handle client withdrawal requests, including various companies owned by
Bitfinex/Tether executives, as well as other ‘friends’ of Bitfinex — meaning human being
friends of Bitfinex employees that were willing to use their bank accounts to transfer money to
Bitfinex clients who had requested withdrawals.” Id. ¶ 60.
170
Id. ¶ 58.
171
Exhibit 44, Matthew Lesing, There’s an $814 Million Mystery Near the Heart of the
Biggest Bitcoin Exchange, BLOOMBERG (Dec. 5, 2017), https://perma.cc/K5W2-C68C.
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belonged to a different company, Crypto SP. Z.O.O., at Spoldzielczy Bank in
Poland.172
196. On March 28, 2018, the United States indicted several individuals
connected to Backpage.com on multiple counts of money laundering and
prostitution.173 This indictment specifically identified Crypto Capital as one of the
companies the Backpage defendants utilized to launder their money.174
197. A week later, on April 6, 2018, Polish law enforcement seized $375
million USD worth of zloty from accounts held by Crypto SP. Z.O.O (the Bitfinex
shadow account), Neso SP. Z.O.O., and ITRAN SP. Z.O.O.175 These companies are
shell companies controlled by Crypto Capital.
172
See also Bitfinex Reveals a New Polish Bank Account Under a Panama Registered
Company, TRUSTNODES (Nov. 22, 2017), https://perma.cc/AEJ6-VEGA.
173
Exhibit 45, Indictment, ECF No. 1, United States v. Lacey, No. 18-CR-422 (D. Ariz.
Mar. 28, 2018). Backpage was a website that had become the largest marketplace for buying and
selling sex before being shut down in April 2018.
174
Id. ¶ 155.
175
Robert-Jan den Haan, The Bitfinex IEO, how did we get here?, THEBLOCK (May 8,
2019), https://perma.cc/F493-P375.
Until April 2016, ITRAN had been named Global Transaction Services. See Exhibit 46,
Indictment, ECF No. 1, Barrs v. United States, No. 16-cr-161 (N.D. Ga. May 10, 2016),
(indictment of operator of Global Transaction Services for money laundering violations).
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198. Polish law enforcement found these companies “did not actually carry
out any economic activity” but “were created solely to make their bank accounts
available for international criminal financial operations.”176
199. These seizures affected Bitfinex’s ability to honor withdrawal requests
and, throughout 2018, Devasini “repeatedly beseeched an individual at Crypto
Capital (“Oz”) to return Bitfinex’s funds.”177
200. About one month later, on May 16, 2018, the United States District
Court for the District of Arizona entered a forfeiture order over funds held in a
Crypto Capital account.178
201. With nowhere else to turn, and even though it had begged Crypto
Capital to release funds for months, Bitfinex was still directing customers to Crypto
Capital into early October 2018.179
202. For example, on October 5, 2018, in an exchange with a Bitfinex
customer seeking to withdraw fiat, Devasini wrote “if you are interested in a faster
176
Rafal Pasztelanski, Kolumbijskie kartele prały setki milionów przez spółki z
Pruszkowa i okolic, TVP.INFO (June 4, 2018), https://perma.cc/449Z-66NM,
https://perma.cc/9TFY-CB7H (Google Translation).
177
Exhibit 2 ¶ 62 (Whitehurst Affirmation).
178
Exhibit 47, Prelim. Order of Forfeiture at 3, ECF No. 22, United States v.
Backpage.com, No. 2:18-CR-00465 (D. Ariz. May 16, 2018).
179
Mike Dudas, Bitfinex appears to be banking with HSBC, THE BLOCK (Oct. 6, 2018),
https://perma.cc/2FSQ-3KB4. This account was maintained at HSBC in New York in the name
of Global Trading Solutions, LLC, one of Crypto Capital’s shell companies.
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solution, please consider www.cryptocapital.co.”180 A minute later, he wrote “with
Cryptocapital moving fiat is a matter of minutes, not days[.] [W]e send and receive
in real time, USD, EUR, JPY.”
203. When the customer pointed out that EUR deposits were suspended on
Bitfinex’s website, Devasini responded “as I said if you open an account with
Cryptocapital we can flow EUR without problem.181
204. Devasini’s assurances to customers helped conceal the reality that
Bitfinex’s banking relationship with Crypto Capital was in chaos.
205. On October 15, 2018, Devasini, going by the name “Merlin,” had the
following exchange with a representative from Crypto Capital, going by the handle
CCC:
Merlin
Hey Oz, sorry to bother you every day, is there any way to move at
least 100M to [redacted]? We are seeing massive withdrawals and
we are not able to face them anymore unless we can transfer some
money out of Cryptocapital.
Merlin
I understand some of the funds are being held by [text hidden], but
what about the rest?
Merlin
under normal circumstances I wouldn't bother you (I never did so
far) but this is a quite special situation and I need your help, thanks
Merlin
I have been telling you since a while
Merlin
180
Exhibit 34 (chat transcript between Devasini and New York trading client in late 2018
and early 2019).
181
Id.
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too many withdrawals waiting for a long time
Merlin
is there any way we can get money from you? Tether or any other
form? Apart with cryptocapital we are running low in cash reserves
Merlin
please help
CCC
I know. We are following the banks we post as many as we can and
let them process as much as possible according to them. Everytime
we push them they push back with account closure without reason
Merlin
dozens of people are now waiting for a withdrawal out of
cryptocapital
Merlin
I need to provide customers with precise answer at this point, can't
just kick the can a little more
Merlin
the international I mean
CCC
I will keep you posted here
CCC
On the process of all international payments.
Merlin
please understand all this could be extremely dangerous for
everybody, the entire crypto community
Merlin
BTC could tank to below 1k if we don't act quickly182
206. A month later, on November 21, 2018, Merlin again desperately
pleaded with the Crypto Capital representative, noting that “it’s always difficult to
tell our customers something real”:
Merlin
please update me about the situation, we have serious problems if
we don't get some funds from you with this week
Merlin
182
Exhibit 2 ¶¶ 63–67 (Whitehurst Affirmation).
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I wish we had some clarity, it's always very difficult to tell our
customers something real and this fuels the uncertainty183
207. Evidence collected in the New York AG’s investigation into Bitfinex
and Tether indicates that “Merlin” is most likely Devasini.184
208. In other words, Bitfinex and Tether were so desperate to access the U.S
financial system and U.S. dollars that they were directing funds to Crypto Capital
despite its clear connection to money laundering, account seizures, and an inability
to move funds out.
209. Defendant Fowler was at the center of Crypto Capital’s operations
during this time. Fowler set up the shell companies and bank accounts that Bitfinex
and Tether depended on.
210. According to the United States Attorney for the Southern District of
New York, Defendant Fowler was involved “in a scheme to operate a shadow bank
on behalf of cryptocurrency exchanges in which hundreds of millions of dollars
passed through accounts controlled by [him] in jurisdictions around the world.”185
As described below, these exchanges included Bitfinex.
183
Id.
184
Exhibit 48, ECF No. 86, James v. iFinex (N.Y. Sup. Ct. Jan. 24, 2018) (email from
Devasini stating his skype account name is “Merlinmagoo” and his telegram account is
“@Merlinthewizard.”).
185
Exhibit 14 at 1 (Fowler Memorandum) (emphasis added).
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211. Interviews conducted in the course of the Department of Justice’s
investigation “corroborated in part” public reporting that Crypto Capital and other
companies associated with Fowler “ha[d] failed to return $851 million” to
Bitfinex.186
212. As alleged by the New York Attorney General, “the lack of access to
money held by Crypto Capital” — at least in part because of the seizure of various
accounts by law enforcement — “made it impossible for Bitfinex to honor its
client[s’] withdrawal requests.”187
213. Virtually all of the “cat and mouse” banking tactics described above
constitute serious federal crimes.
214. Bitfinex and Tether’s inability to honor withdrawal requests in the wake
of account seizures by law enforcement make clear that their illegal activity was
inseparable from their business operations.
v. USDT issuances cannot be reconciled with Tether’s economic
reality
215. Bitfinex and Tether’s banking troubles should have been a constraint
on their ability to issue or redeem USDT — either because they lost part of their 1:1
reserves, or because they were constrained in their ability to receive additional cash
to back up the USDT they were about to issue.
186
Id. at 3.
187
Exhibit 2 ¶ 63 (Whitehurst Affirmation).
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216. Instead, moments of crisis often coincide with Tether issuing massive
amounts of new USDT.
217. On March 31, 2017, Wells Fargo terminated its relationship with
Bitfinex and Tether.188 A couple weeks later, on April 17, 2017, Bitfinex and Tether
lost their last direct banking relationship in Taiwan and stopped accepting
deposits.189 The very next day, Tether issued 10 million USDT.190
218. On April 22, 2017, Tether issued a statement that “all incoming
international wires to Tether have been blocked and refused by our Taiwanese banks.
As such, we do not expect the supply of tethers to increase substantially until these
constraints have been lifted.”191
219. Tether’s next publicly reported banking relationship was its opening of
an account at Noble Bank International in Puerto Rico five months later.192
188
Ex. 19 ¶ 40 (Wells Fargo Complaint).
189
Pausing Wire Deposits to Bitfinex, BITFINEX.COM (April 17, 2017),
https://perma.cc/C3QP-494X.
190
omniexplorer.info (April 18, 2017), https://perma.cc/MF7J-KSLL.
191
Announcement, TETHER.TO (April 22, 2017), https://perma.cc/AW3W-TJZK.
192
In September 2017, Tether opened an account with Noble Bank International in Puerto
Rico. Exhibit 2 ¶53 (Whitehurst Affirmation). Brock Pierce, the original founder of Tether, also
founded Noble Bank International, which had only recently launched on May 11, 2017.
@brockpierce, TWITTER (Aug. 4, 2018) (“Tether was my idea. Haven’t had any involvement or
ownership since the early days. I also started Noble Bank and again haven’t had any involvement
since the early days.”), https://perma.cc/C27P-KUWM; @noblebankint, Noble Bank
International: The Next-Generation Bank Designed for FX & OTC Post-Trade Services,
MEDIUM (May 11, 2017), https://perma.cc/J5KQ-W2DU.
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220. During these five months when Tether lost access to mainstream
banking, it issued 390 million USDT. Tether’s ability to accrue this much money
under these circumstances is questionable, but the number becomes inexplicable
when you consider that for the first 2.5 years of Tether’s existence (October 2014
through March 2017) it issued less than 55 million USDT in total.193
221. In other words, losing access to U.S. dollar clearing marked the
beginning of a five-month period when Tether issued seven times more USDT than
it had the prior two and a half years combined.
222. In absolute numbers, total outstanding USDT had gone from
approximately $60 million while Tether had access to the Wells Fargo correspondent
account, to approximately $450 million after losing it.
223. Tether was becoming untethered, and it would only get worse.
224. From October 28, 2017 to December 20, 2017, Tether issued another
805,048,400 USDT.194 This brought the total amount of all outstanding USDT, and
hence Tether’s supposed cash reserves, to over $1,250,000,000.195 Suspiciously,
193
Tether Supply, BLOCKSPUR, https://blockspur.com/tether/trends/supply.
194
Id.
195
https://coinmarketcap.com/currencies/tether/
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Tether refused to disclose the location of its massive cash reserves without a
nondisclosure agreement in place.196
225. Despite the apparently unprecedented demand for USDT, Bitfinex and
Tether closed new account registrations on December 21, 2017, stating that they
would not re-open until January 15, 2018.197
226. In the short span of less than one month after Bitfinex and Tether closed
the door to potential new market entrants (December 28, 2017 through January 23,
2018), Tether issued more than 1 billion new USDT,198 all of which was supposed
to be backed by U.S. dollars in bank accounts that Tether refused to disclose or
audit.199
227. This rapid series of large issuances came to an abrupt stop on January
24, 2018. This coincidentally was the same day that the Tether Report was published
196
Exhibit 44, There’s an $814 Million Mystery, BLOOMBERG (Dec. 5, 2017),
https://perma.cc/K5W2-C68C.
197
Bitfinex and Tether Close New Accounts Registration, No Longer Accept New Users,
TRUSTNODES (Dec. 21, 2017), https://perma.cc/UCQ2-BSVB.
198
OMNIEXPLORER.INFO, https://perma.cc/YPC4-LTJ9; OMNIEXPLORER.INFO,
https://perma.cc/9JRW-76ND; ETHERSCAN.IO,
https://etherscan.io/token/0xdac17f958d2ee523a2206206994597c13d831ec7?a=0xc6cde7c39eb2
f0f0095f41570af89efc2c1ea828.
199
Exhibit 44, There’s an $814 Million Mystery, BLOOMBERG (Dec. 5, 2017),
https://perma.cc/K5W2-C68C.
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online. The Tether Report identified links between the issuance of USDT and bitcoin
price increases.200
228. Strangely though, issuances resumed even as Crypto Capital’s accounts
began to be targeted by law enforcement around the world (in March, April, May
and October of 2018). On March 20, 2018, Tether issued another 300 million USDT,
bringing the total value of all outstanding USDT to over $2,520,000,000. 201 Tether
issued another 250 million USDT on May 18, 2018.202
229. USDT issuances eventually show some sensitivity to public suspicion
about the legitimacy of Tether and Bitfinex. In the mid-2018, Bitfinex’s worsening
liquidity crisis and the growing evidence that Bitfinex and Tether manipulated the
price of bitcoin resulted in mounting pressure for Bitfinex and Tether to prove their
legitimacy.
230. On June 25, 2018, two weeks after the Griffin paper was published,
Tether issued 250 million USDT.203 A Bloomberg reporter was subsequently shown
bank statements indicating that on July 6, 20, and 24, Tether sent Bitfinex a total of
200
On January 30, 2018, Bloomberg published a story revealing the December 6, 2018
subpoena from the CFTC. Exhibit 49, Matthew Leising, U.S. Regulators Subpoena Crypto
Exchange Bitfinex, Tether, BLOOMBERG (Jan. 30, 2018), https://perma.cc/8EFM-944U.
201
OMNIEXPLORER.INFO, https://perma.cc/2757-LDCD; Tether Supply, blockspur.com,
https://perma.cc/CGZ8-WAMQ.
202
OMNIEXPLORER.INFO, https://perma.cc/2757-LDCD.
203
Id.
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$250 million U.S. dollars and Bitfinex sent 250 million USDT back to the Tether
Treasury. 204 This was held out as evidence that Tether’s cash reserves were genuine
and just so happened to be undertaken right after some of the strongest proof that
Tether was issuing unbacked USDT to manipulate the price of bitcoin.
231. On October 15, 2018, as Bitfinex’s inability to honor withdrawals
became apparent to the market, a massive sell-off caused the price of USDT to drop
as low as $0.85.205
232. On October 23, 2018, the Department of Justice publicly seized Crypto
Capital funds in three U.S. accounts held by Reginald Fowler and/or Global Trading
Solutions LLC at HSBC.206
233. The next day, Tether “revoked” 500 million USDT from the Tether
Treasury, taking it out of circulation and relieving them of an obligation to have
$500,000,000 on hand to back that USDT.207
204
Exhibit 50, Matthew Leising, Crypto-Mystery Clues Suggest Tether Has The Billions It
Promised, BLOOMBERG (Dec. 18, 2018), https://perma.cc/7P5E-6BWB; OMNIEXPLORER.INFO,
https://perma.cc/3UJM-7GKT. While Tether removed the USDT from circulation it did not
“destroy” it as it had promised to do with any redemptions for fiat. See Exhibit 10 at 8 (Tether
White Paper) (“Step 5 - Tether Limited destroys the tethers and sends fiat currency to the user’s
bank account.”).
205
Exhibit 35, Crypto Markets, BLOOMBERG (Oct. 15, 2018), https://perma.cc/VT5T-
LWJW.
206
Exhibit 15 ¶ 7 (Fowler Indictment). The government also seized funds in two
additional accounts with HSBC on November 16, 2018.
207
https://omniexplorer.info/tx/76cc7c991e61749d7f4bf6cc7fec63c2d0286c891e386d9c96b66aa93
9683859; Upcoming USDT Redemption – Oct. 24, 2018, TETHER.TO (Oct. 24, 2018),
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234. Tether revoked these 500 million USDT because its dollar reserves
were increasingly being called into question and it needed to allay concern by
offering proof that it had enough reserves to back all outstanding USDT. Since
Tether didn’t have this much in reserve, it solved this problem by removing 500
million USDT from circulation to reduce its cash reserve requirements to match what
it could show on a bank statement.
235. One week later, on November 1, 2018, Tether published a letter
purportedly from Deltec Bank — with no identifiable signatory — representing that
the “portfolio cash value” of Tether’s account was $1,831,322,828,208 which, if true,
was sufficient to cover the now-reduced total amount in circulation.
236. Deltec is located in the Bahamas, a jurisdiction with strategic
deficiencies in anti-money laundering controls.209 In fact, just four days after Tether
announced its relationship with Deltec Bank, there were public reports on steps “to
seize assets held in bank accounts with Deltec Bank & Trust and Ansbacher
https://web.archive.org/web/20181024170928/https://tether.to/upcoming-usdt-redemption-
october-24th-2018/.
208
Exhibit 51, Tether Letter, TETHER.TO (Nov. 1, 2018), https://perma.cc/974F-3YTV.
209
FIN-2019-A001, Advisory on the Financial Action Task Force-Identified Jurisdictions
with Anti-Money Laundering and Combatting the Financing of Terrorism Deficiencies, FINCEN
(Mar. 8, 2019), https://perma.cc/S4TN-X8DM.
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(Bahamas) as part of a crackdown on corruption linked to the Nicolas Maduro-led
regime.”210
H. NYAG Investigation
237. On April 25, 2019, the Office of the New York Attorney General filed
an ex parte application pursuant to the Martin Act and obtained an order requiring
Bitfinex and Tether to produce certain documents and a preliminary injunction
enjoining them “from taking any further action to access, loan, extend credit,
encumber, pledge, or make any other similar transfer or claim between Bitfinex and
Tether in order to preserve the status quo and protect the interests of New York tether
holders and Bitfinex clients.”211
238. The filings alleged that the Bitfinex trading platform allowed New
Yorkers to purchase and trade virtual currencies” and “explain[ed] how Bitfinex no
longer has access to over $850 million dollars of co-mingled client and corporate
210
Neil Hartnell, Bahamas Bank Accounts Targeted For US Seizure, THE TRIBUNE (Nov.
5, 2018), https://perma.cc/CT26-9KQP; see also Daniel Bethencourt, New Jersey Bank Handled
$20 Million for Firm Tied to Venezuelan Laundering Scheme, MONEYLAUNDERING.COM (July
24, 2019) (“Another large transfer—the $5 million wire from Deltec Bank & Trust Limited in
the Bahamas that prosecutors referenced in their July 2018 complaint against Gustavo
Hernandez— arrived at City National on Feb. 28, 2017, internal records show.”),
https://perma.cc/DUK5-DGLJ.
211
Exhibit 2 ¶¶ 96–97 (Whitehurst Affirmation).
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funds that it handed over without any written contract or assurance, to a Panamanian
entity called ‘Crypto Capital Corp.’”212
239. The filings also stated that even though Tether knew Crypto Capital
funds were inaccessible, in
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.
Exhibit 2 ¶ 85 (Whitehurst Affirmation). Then, in March 2019, the Defendants
purportedly reversed the $625 million ‘transfer’ from Bitfinex’s
to Tether’s Crypto Capital account. That reversal was affected so
that the $625 million cash transfer from Tether’s Deltec account
to Bitfinex’s could be characterized as a loan from Tether to
Bitfinex. That is, the transaction documents treated Bitfinex’s
receipt of $625 million in November 2018 as though Bitfinex had
drawn down $625 million of the $900 million of available credit.
The net result was that Tether had, step by step, diminished the
backing of tethers: first, in November 2018, by going from actual
cash in hand to $625 million in an inaccessible Crypto Capital
account; and then, in November 2018, by replacing even that
questionable source of backing by nothing more than a $625
million IOU from Bitfinex—a related company with serious
enough liquidity problems to require an emergency nine-figure
loan.
212
Press Release, Attorney General James Announces Court Order Against “Crypto”
Currency Company Under Investigation For Fraud, N.Y. Att’y Gen. (April 25, 2019),
https://perma.cc/99U6-NRK9.
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Br. Opp. Stay at 13, ECF No. 6, iFinex Inc. v. James, No. 2019-03341 (1st Dep’t
August 30, 2019).
240. If there was any doubt before, it’s now absolutely clear that Tether no
longer has cash reserves to back USDT at a 1:1 ratio.
241. On August 19, 2019, Judge Cohen denied Bitfinex and Tether’s
motions to dismiss on jurisdictional grounds and dissolved the stay of the OAG’s
investigation, which had been in place since May 16, 2019.213 James v. iFinex Inc.,
No. 450545/2019, 2019 WL 3891172 (N.Y. Sup. Ct. Aug. 19, 2019). Bitfinex and
Tether appealed and moved for a stay pending appeal, ECF No. 4, iFinex Inc. v.
James, No. 2019-03341 (1st Dep’t August 21, 2019). The First Department entered
an order staying discovery on September 24, 2019.214
V. CLASS ALLEGATIONS
242. Plaintiffs bring this action on behalf of themselves and, under Rules
23(a) and (b) of the Federal Rules of Civil Procedure, on behalf of a Class defined
as follows:
All persons or entities that held or transacted in cryptocurrencies,
including but not limited to USDT, ether, bitcoin, and bitcoin
derivatives, in the United States or its territories at any time from
October 6, 2014, through the present (the “Class”).
213
The OAG’s opposition to the motion to dismiss submitted extensive evidence of the
Defendants’ contacts with New York. See Whitehurst Aff. with Exhibits, ECF Nos. 81–108,
James v. iFinex Inc. (N.Y. Sup. Ct. July 8, 2019).
214
https://perma.cc/LXB7-E5GJ.
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243. Excluded from the Class are any Bitfinex or Tether customers subject
to those sites’ Terms of Service which include an arbitration clause, Defendants, and
their officers, directors, management, employees, subsidiaries, or affiliates. Also
excluded is the Judge presiding over this action, his or her law clerks, spouse, and
any person within the third degree of relationship living in the Judge’s household
and the spouse of such a person.
244. Plaintiffs reserve the right to amend the Class definition if further
investigation and/or discovery indicate that the Class definition should be narrowed,
expanded, or otherwise modified.
245. The members of the Class are so numerous that joinder of all members
is impracticable. The precise number of Class members is unknown to Plaintiffs at
this time, but it is believed to be in the tens of thousands. Members of the Class may
be identified by publicly accessible blockchain ledger information. They may be
notified of the pendency of this action by electronic mail using a form of notice
customarily used in class actions.
246. Defendants have acted on grounds that apply generally to the class, so
that final injunctive relief is appropriate respecting the class as a whole.
247. Common questions of law and fact exist as to all Class members and
predominate over any questions solely affecting individual members of the Class.
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248. Plaintiffs’ claims are typical of the claims of the other members of the
Class they seek to represent. Defendants’ practices have targeted and affected all
members of the Class in a similar manner, i.e., they have all sustained damages
arising out of Defendants’ practices.
249. Plaintiffs will continue to fully and adequately protect the interests of
the members of the Class. Plaintiffs have retained counsel competent and
experienced in class actions and cryptocurrency related litigation. Plaintiffs have no
interests antagonistic to or in conflict with those of the Class.
250. A class action is superior to all other available methods for the fair and
efficient adjudication of this controversy since joinder of all members is
impracticable. The prosecution of separate actions by individual members of the
Class would impose heavy burdens upon the courts and would create a risk of
inconsistent or varying adjudications of the questions of law and fact common to the
Class. A class action, on the other hand, would achieve substantial economies of
time, effort, and expense, and would assure uniformity of decision with respect to
persons similarly situated without sacrificing procedural fairness or bringing about
other undesirable results. Furthermore, the interests of the members of the Class in
individually controlling the prosecution of separate actions are theoretical rather than
practical. The Class has a high degree of cohesion, and prosecution of the action
through representatives would be unobjectionable. Finally, as the damages suffered
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by some of the individual Class members may be relatively small, the expense and
burden of individual litigation makes it impossible for members of the Class to
individually redress the wrongs done to them.
251. Plaintiffs anticipate no difficulty in the management of this action as a
class action.
252. WHEREFORE, Plaintiffs request that the Court order that this action
may be maintained as a class action pursuant to Rules 23(a) & (b) of the Federal
Rules of Civil Procedure, that they be named Class Representatives, that Roche
Freedman LLP be named Lead Class Counsel, and that reasonable notice of this
action, as provided by Fed. R. Civ. P. 23(c)(2), be given to the Class.
VI. CAUSES OF ACTION
FIRST CAUSE OF ACTION
Market Manipulation
Commodities Exchange Act (the “CEA”)
(Against DigFinex, the Bitfinex Defendants, the Tether
Defendants, and the Individual Defendants)
253. Plaintiffs incorporate paragraphs 1 to 252.
254. Bitcoin, ether, bitcoin derivatives, including bitcoin futures contracts,
and other cryptocurrencies are commodities within the definition of 7 U.S. Code
§ 1a.
255. DigFinex, the Bitfinex Defendants, the Tether Defendants, and the
Individual DigFinex, Bitfinex, and Tether Defendants (the “Individual
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Defendants”), through the acts alleged, specifically intended to and did cause
unlawful and artificial prices in bitcoin, ether, bitcoin derivatives, including bitcoin
futures contracts, and other cryptocurrencies in violation of the CEA, 7 U.S.C. § 1,
et seq.
256. As demonstrated above, DigFinex, Bitfinex Defendants, Tether
Defendants, and Individual Defendants, individually and collectively, had the ability
to cause, and did cause, artificial prices.
257. Sections 6(c)(1) and 22 of the CEA, 7 U.S.C. §§ 9, 25, make it unlawful
for any person, directly or indirectly, to use or employ or attempt to use or employ,
in connection with any swap, or a contract of sale of any commodity in interstate
commerce, or for future delivery on or subject to the rules of any registered entity,
any manipulative or deceptive device or contrivance, in contravention of such rules
and regulations as the CFTC shall promulgate not later than one year after July 21,
2010, the date Dodd-Frank was enacted. 7 U.S.C. §§ 9, 25.
258. The CFTC timely promulgated Rule 180.1, 17 C.F.R. § 180.1. Rule
180.1 makes it
unlawful for any person, directly or indirectly, in connection with
any swap, or contract of sale of any commodity in interstate
commerce, or contract for future delivery on or subject to the
rules of any registered entity, to intentionally or recklessly:
(1) Use or employ, or attempt to use or employ, any
manipulative device, scheme, or artifice to defraud;
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(2) Make, or attempt to make, any untrue or misleading
statement of a material fact or to omit to state a material fact
necessary in order to make the statements made not untrue or
misleading;
(3) Engage, or attempt to engage, in any act, practice, or
course of business, which operates or would operate as a fraud
or deceit upon any person; or,
(4) Deliver or cause to be delivered, or attempt to deliver
or cause to be delivered, for transmission through the mails or
interstate commerce, by any means of communication
whatsoever, a false or misleading or inaccurate report concerning
crop or market information or conditions that affect or tend to
affect the price of any commodity in interstate commerce,
knowing, or acting in reckless disregard of the fact that such
report is false, misleading or inaccurate.
17 C.F.R. § 180.1(a).
259. DigFinex, the Bitfinex Defendants, the Tether Defendants, and the
Individual Defendants violated Rule 180.1(a), by inter alia, communicating false
information about USDT being backed 1:1, using this unbacked USDT to purchase
bitcoin and sustain false price floors, and otherwise misrepresenting the demand for
USDT, bitcoin, and other cryptocurrencies by issuing unbacked USDT and using it
to execute manipulative trades on, at least, the Bitfinex exchange. These acts were
an illegitimate part of the supply-demand equation, prevented true price discovery,
and caused artificial pricing in the cryptocurrency market.
260. As a direct result of DigFinex, the Bitfinex Defendants, the Tether
Defendants, and the Individual Defendants’ unlawful conduct, Plaintiffs and
members of the Class have suffered actual damages and injury in fact due to artificial
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prices to which they would not have been subject but for the unlawful conduct of the
Defendants as alleged herein. Plaintiffs and members of the Class were further
legally injured and suffered injury in fact because they transacted in bitcoin, ether,
bitcoin derivatives, including bitcoin futures contracts, and other cryptocurrencies,
in an artificial and manipulated market operating under the artificial prices caused
by DigFinex, the Bitfinex Defendants, the Tether Defendants, and the Individual
Defendants. That conduct caused injury to the Plaintiffs and the Class.
261. WHEREFORE Plaintiffs pray that the Court adjudge and decree that
DigFinex, the Bitfinex Defendants, the Tether Defendants, and the Individual
Defendants violated the CEA, 7 U.S.C. § 1, et seq., damaged Plaintiffs thereby, and
enter joint and several judgments against Defendants in favor of Plaintiffs and
members of the Class for the actual damages suffered, and disgorge Defendants of
their ill-gotten gains.
SECOND CAUSE OF ACTION
Principal Agent Liability
Commodities Exchange Act
(Against DigFinex, the Bitfinex Defendants, the Tether
Defendants, and the Individual Defendants)
262. Plaintiffs incorporate paragraphs 1 to 261.
263. Bitcoin, ether, bitcoin derivatives, including bitcoin futures contracts,
and other cryptocurrencies are commodities within the definition of 7 U.S.C. § 1a.
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264. DigFinex, the Bitfinex Defendants, the Tether Defendants, and the
Individual Defendants are each liable under Section 2(a)(1) of the CEA, 7 U.S.C.
§ 2(a)(1), for the manipulative acts of their agents, representatives and/or other
persons acting for them in the scope of their employment.
265. Plaintiffs and members of the Class are each entitled to actual damages
sustained in cryptocurrencies, including bitcoin, ether, bitcoin derivatives, including
bitcoin futures contracts, and other cryptocurrencies, for the violations of the CEA
alleged in this Complaint.
266. WHEREFORE Plaintiffs pray that the Court adjudge and decree that
the DigFinex, the Bitfinex Defendants, the Tether Defendants, and the Individual
Defendants violated the CEA, 7 U.S.C. § 1, et seq., damaged Plaintiffs thereby, and
enter joint and several judgments against Defendants in favor of Plaintiffs and
members of the Class for the actual damages suffered.
THIRD CAUSE OF ACTION
Aiding and Abetting
Commodities Exchange Act
(Against DigFinex, the Bitfinex Defendants, the Tether
Defendants, the Individual Defendants, and the Crypto Capital
Defendants)
267. Plaintiffs incorporate paragraphs 1 to 266.
268. Bitcoin, ether, bitcoin derivatives, including bitcoin futures contracts,
and other cryptocurrencies are commodities within the definition of 7 U.S.C. § 1a.
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269. DigFinex, the Bitfinex Defendants, the Tether Defendants, the
Individual Defendants, and the Crypto Capital Defendants each knowingly aided,
abetted, counseled, induced and/or procured the violations of the CEA by other
defendants. Each did so with knowledge of other defendants’ manipulation of
cryptocurrency prices through unbacked USDT issuances and manipulative trades,
and substantially and willfully intended to assist these manipulations to cause
artificial prices during the Class Period, in violation of Section 22(a)(1) of the CEA,
7 U.S.C. § 25(a)(1).
270. WHEREFORE Plaintiffs pray that the Court adjudge and decree that
DigFinex, the Bitfinex Defendants, the Tether Defendants, and the Individual
Defendants violated the CEA, 7 U.S.C. § 1, et seq., damaged Plaintiffs thereby, and
enter joint and several judgments against Defendants in favor of Plaintiffs and
members of the Class for actual damages suffered.
FOURTH CAUSE OF ACTION
Unlawful Competition
Sherman Act § 2
(Against the Tether Defendants)
271. Plaintiffs incorporate paragraphs 1 to 270.
272. This action arises out of 15 U.S.C. § 15 that provides a civil remedy by
a party that was injured due to a violation of 15 U.S.C. § 2.
273. Defendant Tether controls more than 80% of the market for stablecoins
in the United States and the world. Tether therefore has monopoly power.
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274. Tether’s monopoly power allows it to raise prices and exclude
competition within the cryptocurrency market.
275. As described in detail above, Tether has issued massive amounts of
unbacked USDT to flood the stablecoin market with USDT so as to willfully
maintain its monopoly on the market and exclude competition.
276. Its issuance of unbacked USDT was designed to gain greater market
share so Tether could eliminate stablecoin competition and maintain pricing control
over the bitcoin and cryptocurrency market.
277. Tether’s actions have actually harmed competition, consumers, and
members of the Class by decreasing consumer choice for other stablecoins and
fraudulently manipulating the price of bitcoin and other cryptocurrencies.
278. As a result of Tether’s abusive actions, Plaintiffs and members of the
Class suffered economic damages, including compensatory and consequential
damages.
279. WHEREFORE, Plaintiffs request that the Court adjudge and decree
that Plaintiffs and members of the Class have antitrust standing under the Clayton
Antitrust Act, 15 U.S.C. §§ 15 & 26; that the Tether Defendants violated the
Sherman Antitrust Act, 15 U.S.C. § 2; enter joint and several judgments against
Defendants in favor of Plaintiffs and members of the Class; and award Plaintiffs and
members of the Class actual damages, treble damages, and attorneys’ fees.
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FIFTH CAUSE OF ACTION
RICO 18 U.S.C. § 1962(c)
(Against All Defendants)
280. Plaintiffs incorporate paragraphs 1 to 279.
281. This Count is against DigFinex, the Bitfinex Defendants, the Tether
Defendants, the Individual Defendants and the Crypto Capital defendants
(collectively, the “Count Five Defendants”).
282. The Count Five Defendants together constitute an “enterprise” within
the definition of 18 U.S.C. § 1961(4), that is, a group of persons associated in fact,
engaged in and whose activities affect interstate commerce.
283. Each of the Count Five Defendants agreed to and did conduct and
participate in the conduct of the enterprise’s affairs through a pattern of unlawful
racketeering activity and for the unlawful purpose of intentionally defrauding the
Plaintiffs through the manipulation of cryptocurrency prices.
284. Pursuant to and in furtherance of their fraudulent scheme, the Count
Five Defendants committed multiple related acts that constitute a pattern of
racketeering activity pursuant to 18 U.S.C. § 1961(5), including but not limited to
the following examples:
a. Operating an Unlicensed Money Transmitting Business (18 U.S.C.
1960(b)(1)(A)).
i. Exchangers of convertible virtual currency are “money
transmitters” as defined at 31 C.F.R § 1010.100(ff) (5) and
“financial institutions” as defined at 31 C.F.R § 1010.100(t).
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ii. Operating an unlicensed money transmitting business in New
York is a Class A misdemeanor. N.Y. Banking Law § 650(2).
iii. From the beginning of the Class Period to the present, DigFinex,
the Bitfinex Defendants, and the Individual Defendants operated
Bitfinex as a money transmitting business which affects
interstate or foreign commerce “without an appropriate money
transmitting license” in New York and other states “where such
operation is punishable as a misdemeanor or a felony under State
law.” 18 U.S.C. § 1960(b)(1)(A).
iv. From the beginning of the Class Period to the present, DigFinex,
the Tether Defendants, and the Individual Defendants operated
Tether as money transmitting business which affects interstate or
foreign commerce “without an appropriate money transmitting
license” in New York and other states “where such operation is
punishable as a misdemeanor or a felony under State law.” 18
U.S.C. § 1960(b)(1)(A).
v. From the beginning of the Class Period to the present, Crypto
Capital Corp., Global Trade Solutions AG and Reginald Fowler
operated Crypto Capital as a money transmitting business which
affects interstate or foreign commerce “without an appropriate
money transmitting license” in New York and other states
“where such operation is punishable as a misdemeanor or a
felony under State law.” 18 U.S.C. § 1960(b)(1)(A).
b. Operating an Unlicensed Money Transmitting Business (18 U.S.C.
1960(b)(1)(B)).
i. From the beginning of the Class Period to the present, DigFinex
and the Bitfinex and Individual Defendants operated Bitfinex as
a money transmitting businesses that failed “to comply with the
money transmitting business registration requirements under
section 5330 of title 31, United States Code, or regulations
prescribed under such section.” 18 U.S.C. § 1960(b)(1)(B).
ii. While the Count Five Defendants registered BFXNA Inc. as
money services business with FinCEN, they have falsely
reported that its activities were limited to Wyoming, and also
conducted Bitfinex’s money transmitting business in the United
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States through a number of other unregistered entities and shell
companies.
iii. From the beginning of the Class Period to the present, DigFinex
the Tether Defendants, and Individual Defendants operated
Tether as a money transmitting business that failed “to comply
with the money transmitting business registration requirements
under section 5330 of title 31, United States Code, or regulations
prescribed under such section.” 18 U.S.C. § 1960(b)(1)(B).
iv. While the DigFinex, the Tether Defendants, and Individual
Defendants registered Tether Limited as a money services
business with FinCEN, they have falsely reported that its
activities were limited to Wyoming, and also conducted Tether’s
money transmitting business in the United States through a
number of other unregistered entities and shell companies.
v. From the beginning of the Class Period to the present, Crypto
Capital Corp., Global Trade Solutions AG and Reginald Fowler
operated Crypto Capital operated Crypto Capital as a money
transmitting business that failed “to comply with the money
transmitting business registration requirements under section
5330 of title 31, United States Code, or regulations prescribed
under such section.” 18 U.S.C. § 1960(b)(1)(B).
c. Operating an Unlicensed Money Transmitting Business (18 U.S.C.
1960(b)(1)(C)).
i. From the beginning of the Class Period to the present, the Count
Five Defendants operation of Bitfinex, Tether, and Crypto
Capital involved “the transportation or transmission of funds”
they knew “to have been derived from a criminal offense or
[we]re intended to be used to promote or support unlawful
activity” in violation of 18 U.S.C. § 1960(b)(1)(C).
ii. For example, even though he knew that Crypto Capital funds had
been seized by law enforcement, Devasini continued to instruct
customers to use Crypto Capital for withdrawals.
d. Money Laundering (18 U.S.C. § 1956)
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i. During the Class Period, the Count Five Defendants used and
directed customers to use various bank accounts opened by
Crypto Capital to engage in U.S. dollar transactions with the
intent to conceal or disguise the true nature, location, source,
ownership, or control of the funds, including:
1. An account in the name Crypto S.P. Z.O.O. at
Spoldzielczy Bank in Poland that was used on or around
November 2017;
2. Accounts in the names of Global Trade Solutions AG,
MOGW Energy Trade LDA, and Eligibility Criterion
Unipessoal LDA at Caixa Geral de Depositos in Portugal
that were used on or around February 2018;
3. Accounts in the name of Global Trading Solutions, LLC
at HSBC Bank N.A. in New York on or around October
2018, Enterprise Bank & Trust in New Jersey during 2018,
and Citibank in New York during 2018.
ii. During the Class Period, the Defendants used Renrenbee Limited
as a shell company to open bank accounts and engage in U.S.
dollar transactions with the intent to conceal or disguise the true
nature, location, source, ownership, or control of the funds.
iii. On or around January 24, 2018, the Count Five Defendants used
Haparc B.V. as a shell company to open a bank account at ING
Bank and engage in U.S. dollar transactions with the intent to
conceal or disguise the true nature, location, source, ownership,
or control of the funds.
iv. On or around June 15, 2018, the Count Five Defendants
incorporated the Hong Kong company Prosperity Revenue
Merchandising and by October 16, 2018 had begun using it as a
shell company to open a bank account at the Bank of
Communications and engage in U.S. dollar transactions through
a correspondent account at Citibank in New York with the intent
to conceal or disguise the true nature, location, source,
ownership, or control of the funds.
e. Bank Fraud (18 U.S.C. § 1344)
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i. From 2015 to the present, the Count Five Defendants knowingly
executed and attempted to execute a scheme or artifice to defraud
a U.S. financial institution, and to obtain moneys, funds, credits,
assets, securities, and other property owned by and under the
custody and control of a U.S. financial institution, by means of
false and fraudulent pretenses, representations, and promises.
ii. The Count Five Defendants “intended to and did victimize the
U.S. banks and exposed them to actual or potential losses” when
they used shell companies like those described above in
paragraph 284(d) and repeatedly “provided false and misleading
statements through the use of multiple layered entities and by
stripping material information from wire transfer instructions
which influenced the decision-making of the U.S. banks.”215
f. Monetary Transactions Derived from Specified Unlawful Activities (18
U.S.C. § 1957).
i. The Count Five Defendants also knowingly engaged in monetary
transactions with funds derived from specified unlawful
activities, namely operating an unlicensed money transmitting
business, money laundering, and bank fraud in violation of 18
U.S.C. §§ 1960, 1956, 1344.
g. Monetary Transactions Derived from Specified Unlawful Activities (18
U.S.C. § 1957).
i. The Count Five Defendants also knowingly engaged in monetary
transactions with funds derived from specified unlawful
activities, namely operating an unlicensed money transmitting
business, money laundering, and bank fraud in violation of 18
U.S.C. §§ 1960, 1956, 1344.
h. Wire Fraud (18 U.S.C. § 1343)
i. The Count Five Defendants knowingly engaged in wire fraud by
transmitting by means of wire, i.e. the internet, numerous and
215
United States v. Zarrab, No. 15-CR-867 (RMB), 2016 WL 6820737, at *13 (S.D.N.Y.
Oct. 17, 2016).
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false representations that, inter alia, USDT were backed 1:1 by
U.S. dollars in violation of 18 U.S.C. § 1343.
ii. For example, even though he knew that Crypto Capital could not
process transactions, Devasini continued to instruct customers to
use Crypto Capital in violation of 18 U.S.C. § 1343.
285. The acts of money laundering, bank fraud, monetary transactions
derived from specified unlawful activities, wire fraud, and the operation of an
unlicensed money transmitting business set forth above constitute a pattern of
racketeering activity pursuant to 18 U.S.C. § 1961(5).
286. The Count Five Defendants have directly and indirectly conducted and
participated in the conduct of the enterprise’s affairs through the pattern of
racketeering and activity described above, in violation of 18 U.S.C. § 1962(c).
287. As a direct and proximate result of the Count Five Defendants’
racketeering activities and violations of 18 U.S.C. § 1962(c), the Count Five
Defendants were able to manipulate cryptocurrency prices and injure Plaintiffs’
property.
288. WHEREFORE, Plaintiffs request that this Court enter judgment against
the Count Five Defendants for actual damages, treble damages, attorneys’ fees and
disgorgement of ill-gotten gains.
SIXTH CAUSE OF ACTION
Fraud
(Against the Bitfinex Defendants and Tether Defendants)
289. Plaintiffs incorporate the paragraphs 1 to 288.
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290. The Bitfinex and Tether Defendants repeatedly made materially false
statements, or misleadingly omitted to state a material fact, including the following
examples:
a. On October 5, 2019, the Bitfinex website falsely stated “All Tether
tokens are fully backed by reserves and are issued and traded on
Bitfinex pursuant to market demand, and not for the purpose of
controlling the pricing of crypto assets.”
b. On August 20, 2019, the Bitfinex website falsely stated that “Any
assertion that we have misled our customers about Tether (USDT), its
backing, or about the negotiated transaction between Bitfinex and
Tether is false.”
c. Until at least August 17, 2019, Bitfinex’s website falsely stated that
“outstanding [USDT] are backed 1-to-1 by traditional currency,” that
“1 USDT is always equivalent to 1 USD.”
d. On March 4, 2019, Tether’s website falsely stated that USDT was “1-1
pegged to the dollar” and “100% backed.”
e. Until February 19, 2019, Tether’s website falsely stated that “[E]very
[USDT] is backed 1-1 by traditional currency held in our reserves. So,
1 USDT is always equivalent to 1 USD.”
f. In a sworn declaration dated April 5, 2017, Velde falsely stated that
Tether is a financial technology company that operates a platform to
store, send, and make purchases with a form of digital currency – digital
tokens called tethers – that are fully backed by U.S. dollars on deposit
from customers,” that “[USDT] may be redeemed or exchanged for the
underlying U.S. dollars,” that “customers who want to purchase
[USDT] through Tether must deposit U.S. dollars in their Tether
account and in exchange receive an equivalent amount of [USDT] until
they ask Tether to remit back the U.S. dollars they deposited. . . . For
these systems to work, customers depend on Bitfinex’s and Tether’s
ability to send back to them the U.S. dollars they deposited with
Bitfinex or Tether.”
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g. On June 17, 2016, Tether released a white paper that falsely stated that
“each [USDT] in circulation represents one US dollar held in our
reserves (i.e. a one-to-one ratio) which means the system is fully
reserved when the sum of all [USDT] in existence (at any point in time)
is exactly equal to the balance of USD held in our reserve” and that that
USDT “may be redeemable/exchangeable for the underlying fiat
currency pursuant to Tether Limited’s terms of service or, if the holder
prefers, the equivalent spot value in Bitcoin.”216
h. Until at least March 20, 2015, Tether’s website falsely stated that
“Tether currencies are essentially Dollars, Euros, and Yen formatted to
work on the Blockchain. [USDT]s always hold their value at 1:1 to their
underlying assets.”
i. Until at least March 20, 2015, Tether’s website falsely stated that USDT
“is backed 100% by actual fiat currency assets in our reserve account
and always maintains a one-to-one ratio with any currency held. For
example, 1 USDT = 1 USD. With almost zero conversion and transfer
fees, [USDT] is redeemable for cash at any time.”
j. On January 15, 2015, Bitfinex falsely stated that “Each [USDT] is
backed 1-to-1 by its corresponding currency, which can be viewed and
verified in real-time via the Tether.to website and on the Blockchain.
Tether will be fully transparent and audited to demonstrate 100%
reserves at all times.”
k. Bitfinex’s use of unbacked USDT was also fraudulent as it was a false
representation to the market of bitcoin’s price and demand.
291. The Bitfinex Defendants and Tether Defendants made these statements
knowing that they were false, or with reckless disregard for their truth.
292. The Bitfinex Defendants and Tether Defendants never corrected these
materially false statements and continue to represent to Plaintiffs and the public that
USDT was backed by a 1:1 guarantee.
216
Id. at 4.
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293. The Bitfinex Defendants and the Tether Defendants intended that the
market, and Plaintiffs as participants in the market, rely on these false
representations of material fact.
294. Plaintiffs reasonably relied on these false representations of material
fact to their detriment when purchasing and selling cryptocurrencies at artificial
prices caused by these materially false statements.
295. As an actual and proximate result of the above, Plaintiffs have suffered
actual damages in a result to be determined at trial.
296. The Bitfinex Defendants and Tether Defendants committed all of the
aforesaid acts deliberately, willfully, maliciously and oppressively.
297. WHEREFORE, Plaintiffs request that this Court enter judgment against
the Bitfinex and Tether Defendants for actual damages and punitive damages.
SEVENTH CAUSE OF ACTION
Violation of the New York Deceptive Trade Practices Law NY GBL §349
(Against the Bitfinex Defendants and Tether Defendants)
298. Plaintiffs incorporate the paragraphs 1 to 297.
299. In committing the acts alleged above, the Bitfinex and Tether
Defendants engaged in unfair, deceptive, untrue or misleading acts by omitting, or
failing to disclose the material fact that USDT was not backed 1:1 and that the market
demand created by the Bitfinex and Tether Defendants was fraudulent.
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300. These above-described unlawful, unfair and fraudulent business
practices by the Tether and Bitfinex Defendants present an ongoing threat to
Plaintiffs and the putative Class. The Tether and Bitfinex Defendants have
systematically perpetrated deceptive and unfair practices upon members of the
public and have intentionally deceived the market.
301. The Bitfinex and Tether Defendants’ willful and knowing violation of
NY GBL §349 has caused Plaintiffs and the Class to suffer injury.
302. Further, the Bitfinex and Tether Defendants’ deceptive practices were
consumer-oriented aimed at manipulating the cryptocurrency market and thereby
transfer wealth from consumers to themselves.
303. The Bitfinex and Tether Defendants should be required to make
restitutionary disgorgement of its ill-gotten profits pursuant to GBL §349.
304. Plaintiffs are entitled to all applicable damages, including treble
damages, injunctive relief, and attorneys’ fees pursuant to GBL §349-h.
EIGHTH CAUSE OF ACTION
Permanent Injunctive Relief
(Against the Bitfinex Defendants and Tether Defendants)
305. Plaintiffs incorporate the paragraphs 1 to 304, and to the extent
necessary, plead this cause of action in the alternative.
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306. Permanent and irreparable injury will result unless the Tether and
Bitfinex Defendants are permanently stopped from issuing unbacked USDT and/or
using that USDT and the Bitfinex exchange to manipulate the price of bitcoin.
307. Accordingly, Plaintiffs seek permanent and injunctive relief prohibiting
this practice
308. WHEREFORE, Plaintiffs request this Court enter judgment against the
Tether and Bitfinex Defendants for injective relief as permitted by law.
COSTS, INTEREST, AND ATTORNEYS’ FEES
309. WHEREFORE, Plaintiffs request that the Court award reasonable costs
of suit, pre- and post-judgment interest, and reasonable attorney’s fees.
JURY TRIAL
310. Plaintiffs demand a trial by jury for all claims.
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Dated: October 6, 2019
/s/ Joseph M. Delich
Kyle W. Roche (admission pending)
Joseph M. Delich
ROCHE FREEDMAN LLP
185 Wythe Ave. F2
Brooklyn, NY 11249
kyle@rochefreemdan.com
jdelich@rochefreedman.com
Velvel (Devin) Freedman (pro hac vice pending)
ROCHE FREEDMAN LLP
200 South Biscayne Boulevard
Suite 5500
Miami, Florida 33131
vel@rochefreedman.com
Attorneys for Plaintiffs
95