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Appellate Court Greenlights NYAG’s Bitfinex Investigation

As we previously reported, for over a year the New York Attorney General has been seeking to enforce an investigative subpoena under New York’s expansive Martin Act against cryptocurrency exchange Bitfinex and its affiliated companies that issue the Tether stablecoin. Bitfinex and its affiliates have raised a number of procedural challenges to the NYAG’s authority to conduct its investigation.  In a case addressing important issues about the scope of the NYAG’s investigative authority over cryptocurrency businesses, a New York appellate court on July 9, 2020, rejected Bitfinex’s challenges and authorized the NYAG investigation to proceed.

Many of Bitfinex’s legal arguments to the court were procedural in nature, and in particular Bitfinex challenged both the court’s subject matter and personal jurisdiction over it. On the issue of subject matter jurisdiction, Bitfinex argued that Tether does not qualify as a “security” or “commodity” as those terms are defined in the Martin Act.  The appellate court quickly rejected Bitfinex’s arguments. In particular, it noted that the Martin Act’s definition of “commodities,” which includes “any foreign currency, any other good, article, or material,” is broad enough to encompass Tether. The court also observed that several federal courts and the Commodity Futures Trading Commission have also found that virtual currencies are commodities under the federal Commodities Exchange Act, which defines the term more narrowly than does the Martin Act to only include “all other goods and articles . . . and all services rights and interests . . . in which contracts for future delivery are presently or in the future dealt in.”  Thus, because Tether is at minimum a commodity, New York courts had subject matter jurisdiction under the Martin Act.

Additionally, Bitfinex argued that the trial court lacked specific personal jurisdiction over it because the NYAG failed to demonstrate a sufficient connection between Bitfinex’s activity in New York and the activities under investigation. The appellate court found this argument “unavailing.” To this end, the court cataloged numerous contacts Bitfinex or its affiliates had with New York state over various periods of time.  These contacts included permitting New York-based customers to trade Tether, permitting such customers to redeem Tether, permitting an executive to reside and conduct business in New York on its behalf (including with New York-based customers), and maintaining accounts with New York banks.

The court also noted that the issue before it is not the existence of personal jurisdiction for a lawsuit but merely for an investigation, which requires “a far lighter showing.” Thus, the court ruled that the NYAG made a sufficient showing of personal jurisdiction in the context of the Martin Act investigation.  It reasoned that the NYAG may properly investigate a foreign entity when there is a reasonable basis for believing that it has violated a New York statute, and the NYAG’s request to enforce a subpoena is not improper because it may produce the evidence required to establish that the target of the investigation is in fact doing business in New York.

Because of the broad scope of the Martin Act and the difficulty associated with obtaining a BitLicense, many cryptocurrency businesses have attempted to structure their operations to avoid doing business in New York or with New York-based customers. This case demonstrates the practical difficulties of conducting operations in such a manner. It also provides clear authority for the proposition that the NYAG may investigate the activities of stablecoin issuers that are accused of violating the Martin Act.

Copyright © 2020, Hunton Andrews Kurth LLP. All Rights Reserved.National Law Review, Volume X, Number 197

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About this Author

Scott H. Kimpel Capital Markets and Securities Practice Hunton Andrews Kurth Washington, DC
Partner

Scott brings in-depth knowledge of SEC policies, procedures and enforcement philosophy to each representation.

Scott regularly advises clients across a broad sector of the economy facing sensitive reporting, compliance and enforcement matters before the Securities and Exchange Commission and other capital markets regulators. His practice encompasses a wide range of matters involving the securities laws, mergers and acquisitions, corporate governance, regulatory enforcement, administrative law and public policy. Scott also leads the firm’s working group on blockchain and distributed...

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