The Best Case Scenario for Tether’s Activities in 2017

In 2017 Tether was issuing unbacked Tethers. This has been confirmed as part of their settlement with the New York Attorney’s General office. As an exercise in trying to ensure that I have not become overly biased around Tether what I will attempt to do in this article is construct the best case scenario for how Tether’s business was operating.

Continue reading “The Best Case Scenario for Tether’s Activities in 2017”

Analysis of the New York Supreme Court Remittitur in the Tether and Bitfinex New York Attorney General Cases

UPDATE: This was refiled presumably as part of the formal movement from the Supreme Court back to trial and the actual decision came down in July. Thank you to Rob Stevens for reminding me of this fact.

Document

There was finally a new development in the long delayed Digfinex/iFinex/Bitfinex/Tether NYAG case. The New York State Supreme Court heard the appeal from Bitfinex and unanimously decided to send them back to trial, dismissed their motion to dismiss, and reaffirmed that they need to supply the ordered documents.

I will review the document below.

The judges lay out initially that this appeal was absolutely meaningless from the start, and nonetheless take the time to lay out why each of Bitfinex’s arguments are invalid.

They begin (as shall I) with Tether’s argument that it is neither a security or a commodity and as such these activities surrounding Tether are not covered under the Martin Act. The judge strongly disagrees.

The first point laid out here is explaining that Bitfinex did not appeal correctly to challenge the NYAG jurisdiction, and instead in effect were trying to appeal the right of the Supreme Court to hear an application for this type of order.

The second point follows along with this one to emphasize that they did not appeal the order they appear to have a problem with.

The third point, is laying out even if they had handled this appeal correctly Tether would still be found to be covered under the Martin Act.

After settling the issue of whether Tether was neither a commodity a security they addressed the argument by Bitfinex that the New York Supreme Court lacked personal jurisdiction. In this argument Bitfinex tried to claim that there was insufficient link between their activity in New York and the alleged fraud. The judge did not find this argument convincing at all.

The first point that the judge emphasizes is that a single transaction is sufficient for their to be jurisdiction. They further affirm that since the investigation now centers around a fraud perpetrated by deceit about backing that it would affect the New York traders/Tether holders.

The judge then conveniently reviews for us some of the many ways that Bitfinex/Tether are tied to New York. Namely: they had traders in New York, they had traders in New York even after allegedly banning traders from New York, they had an executive working in New York (Phil Potter), the New York based executive they had specifically collaborated with other businesses who were based in New York, and finally that they hired multiple other firms in New York.

Even after thoroughly pointing out that Tether was deeply linked to New York, the judge elected to continue and point out that generally as long as there is sufficient evidence of some connection they will allow for an order like discovery to go forward in order to determine the extent to which a connection exists.

The final argument that Bitfinex has trotted out several times is that they were not served properly. The judge clearly points out that this is a ridiculous claim, and that Bitfinex’s counsel who had been working with the New York Attorney General during the investigation was served by hand, email, and overnight delivery.

In conclusion, this case has been moved from the appellate court back to trial, Bitfinex and Tether must hand over the documents requested, and they are now in an extraordinarily difficult position.

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Why Does Tether Deserve the Benefit of the Doubt?

I have been told that I am prone to seeing plots in the mundane, and in trying to make mountains out of molehills when it comes to Tether. I have been told that I do not give them the benefit of the doubt or try to find charitable explanations for their behaviors. I am left wondering, why does Tether deserve the benefit of the doubt?

Tether was founded in 2014, and was almost immediately owned and controlled by the same principals as Bitfinex. This was not fully brought to light until the Panama Papers were leaked and it was also mentioned in Bitfinex’s lawsuit against Wells Fargo. Does this level of transparency deserve the benefit of the doubt? UPDATE: MORE CONTEXT HERE

Tether originally claimed to be backed solely by the currency represented. So USDT would be backed solely by USD. However, early on they also advertised exchanging Bitcoin for Tether through Tether. This was also advertised as a way to get Tethers without going through Know Your Customer regulations and processes. Does that also deserve the benefit of the doubt? Coincidentally, Tether’s lawyer said in the recent NYAG case that part of their reserves were invested in Bitcoin. I’m sure that is nothing though.

Tether loaned 100’s of millions of dollars to another business well knowing that the funds that business was going to give in return were currently not able to be withdrawn. Does that deserve the benefit of the doubt?

Tether was once hacked for ~$30m. Their response was to never explain what happened and force a hard fork of the Omni protocol to freeze those tokens. Does that deserve the benefit of the doubt? Luckily for Tether the Omni devs added in the ability for them to freeze any Tether at will.

Tether was supposed to be regularly audited for transparency. They eventually released monthly attestations from an accounting firm in Taiwan, and then those stopped. Then they released a statement from an auditing firm, and then there was nothing for a long time, and then they released a statement from a law firm, and since then nothing.

Perhaps the reason they are having so much trouble getting audited is because they’re incompetent at record keeping. They admitted during the proceedings of the NYAG case that they commingled corporate and client funds. Furthermore, Tether has a transparency page that has been incorrect for months. They claim that they have $31,304,655.00 Tether on Omni. Let’s go to the blockchain quick and check their math: $354,645.00 + $3,100,000.00 + $30,950,000.00 + $940,000.00 + $2,039,980.00 = $37,384,625. So they are unable to even add, yet we are supposed to give them the benefit of the doubt?

Analysis of December NYAG and Tether Filings

Disclaimer: I am not a lawyer, this is not legal advice or financial advice or life advice or medical advice or romance advice. Especially not romance.

So this is more than a little bit delayed, but better late than never I figure. You can see the original threads that I am going to be reviewing for this analysis here: NYAG and here: Tether.

The fundamental tension between the NYAG has become less a dispute about facts and more frequently a dispute about service, jurisdiction, precedents, and language. Tether especially was much more creative in this filing than previous ones.

Let’s start by outlining the broad strokes of the NYAG argument. Their primary thrust seems to be that Tether’s claim of improper service is invalid, due to existing precedence and their failure to bring it up in an earlier motion. They also find themselves frustrated by the lack of documents that have been provided by the merry men of Digfinex.

Listen if I am going to be blunt I think all of this posturing around jurisdiction is a load of shit. The Block reported [paywalled] that it was relatively easy for a NY resident who was moderately comfortable with lying to get an account there. Now based on the New Yorkers I have seen on the national stage recently I have reason to believe at least some New York residents are comfortable lying. Also it appears that the requirements for Martin Act jurisdiction are relatively light and we also know that an accounting firm they hired, a PR firm they hired, were also in New York. Oh also they helped onboard a New York based trading outfit and loaned them Tethers. Now you can argue that the Martin Act provides too much jurisdiction, but if that is the thrust of your argument you’re going to struggle.

Now looking more in detail at the Tether response we see some excitement from their lawyers for once. One of their primary thrusts seems to be that they were improperly served, and thus everything from then is bunk. It really comes down to whether serving the outside counsel of Bitfinex who was communicating with NYAG was appropriate or not. I am not qualified to assess the law, but it seems to me that they are unlikely to win this service argument.

The second thrust of their argument is jurisdictional. Namely the New Yorkers we worked with either were technically international or we did not know they were New Yorkers. This argument would hold a little more impact if they did you know anything except asking a single question to determine if someone was from New York.

Then they try to argue that Tether is not a security or a commodity and thus not subject to Martin Act. This is their most creative argument, but it seems the reach of the Martin act will still bring them to heel here.

Overall, my assessment of these two responses together is that Tether and Bitfinex are in a pickle and are taking steps to lengthen the proceedings and win in the court of public opinion.

Key Excerpts and Commentary from NYAG/Tether Court Transcript

First of all link to the transcript: https://www.docdroid.net/Wk3pePO/transcript-may-16-2019.pdf

Second of all congrats to @lawmaster and The Block for a great scoop.  https://t.co/22w3xY8mc8 Now let’s get down to business.

Bitfinex is still being hesitant to hand over documents to the NYAG.  They have struggled to get access to documents relating to the transfer from Tether to Bitfinex, and this suggests to me that either the documents don’t exist or there is a very good reason they are not being shared.

Screen Shot 2019-05-21 at 5.03.56 PM

This is directly contrary to what Bitfinex has claimed to the public wherein they have claimed that they have been fully cooperative. https://www.bitfinex.com/posts/356 Archive link: https://web.archive.org/web/20190521220643/https://www.bitfinex.com/posts/356Screen Shot 2019-05-21 at 5.05.47 PMHowever, I’m sure that there is no reason to think that Bitfinex is hiding something. No reason at all.Screen Shot 2019-05-21 at 5.09.29 PM

Shortly after this we learn very interesting things, Tether’s lawyer admits to Tether investing in Bitcoin:

Screen Shot 2019-05-21 at 5.13.37 PM

Luckily we have a sharp judge here who quickly gets to the meet of the issue and correctly points out that this seems contrary to the nature of a “Stablecoin”.Screen Shot 2019-05-21 at 5.14.31 PM

The Tether lawyer responds by confirming what we all suspected since the ToS change is that other assets includes cryptocurrencies:Screen Shot 2019-05-21 at 5.15.35 PM

The Tether lawyer then continues basically saying they will not produce documents and will instead appeal and challenge every single step of the way:Screen Shot 2019-05-21 at 5.17.11 PM

The Tether lawyer then also says that they do not think there is any amount of dollars they need to keep in reserve:Screen Shot 2019-05-21 at 5.19.17 PM

The Tether lawyer then takes the classic Tether defender tactic of it’s okay because banks do it too:Screen Shot 2019-05-21 at 5.20.19 PM

The judge quickly ascertains the issue with this and points out that this effectively means there is no reserves:Screen Shot 2019-05-21 at 5.21.18 PM

The Tether lawyer responds by saying it’s okay, if they need to they’ll earn money some other way, pay it back, and just delay redemptions:

Screen Shot 2019-05-21 at 5.22.23 PM

A little further down the NYAG reveals that Bitfinex/Tether executives get lump sum payouts from the unsegregated Tether accounts where no reserves have to be kept:

Screen Shot 2019-05-21 at 5.25.12 PM

The NYAG also reveals the juicy tidbit that the largest redemption ever was less than $25 million:

Screen Shot 2019-05-21 at 5.29.07 PM

Why is this particularly juicy? Well let’s take a quick trip over to their treasury address on Omni: https://omniexplorer.info/address/1NTMakcgVwQpMdGxRQnFKyb3G1FAJysSfz/1 here it does not take long to find bigger transactions coming in than that like this: https://omniexplorer.info/tx/572792736c6846998ac0b8c532d0317f7d8460886ce900bb6005260ed66cd80a So somethign is seriously amiss here.

Now relevant to this entire document is the issue of disclosure. Tether claims that they are not in the wrong because once they started using other assets they disclosed it.  However, is that true? I will contend it is not. Let us consider Tether’s own website: https://web.archive.org/web/20150521003646/https://tether.to/faqs/

In 2015 Tether openly admits to exchanging Bitcoins for Tethers without KYC. Now it is possible, but in my opinion unlikely that they still had sufficient fiat reserves at that point, but I think it is plausible to doubt that and to believe that Bitcoins have often been a part of the backing.

Screen Shot 2019-05-21 at 5.48.34 PM

In conclusion: Tether has paid executives dividends out of non-segregated accounts, does not feel a need to keep cash reserves, is buying bitcoins with reserves, and cannot handle a rush to redeem.  Their largest claimed transaction is also smaller than multiple apparent redemptions on the blockchain.

Update 5/23/19: I remembered in a dream last night that Tether discussed in their whitepaper people being able to redeem for bitcoins. https://tether.to/wp-content/uploads/2016/06/TetherWhitePaper.pdf

tetherbits

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