WILL BITFINEX AND TETHER PROVE THEY DID NOT DO BUSINESS IN NEW YORK?
By Sasha Hodder on July 24, 2019
Today Bitfinex and Tether, replied to the OAG with two documents, an affidavit by their attorney, Stuart Hoegner, and a Reply Memo supporting their Motion to Dismiss.
Bitfinex and Tether are attempting to have the OAG’s case against them dismissed for lack of jurisdiction, based on the following: (1) OAG failed to serve Respondents in the manner required by statute; (2) Respondents long barred U.S. persons from their platforms, and so have not purposefully availed themselves of doing business in New York; (3) Tether is neither a security nor a commodity under the Martin Act; and (4) Gen. Bus. L. § 354 does not apply extraterritorially.
First, let’s take a look at the broad jurisdictional rules, and then review Bitfiinex and Tether’s responses.
PERSONAL & SUBJECT MATTER JURISDICTION:
To make a legally valid decision, a court must have two types of jurisdiction: personal and subject matter jurisdiction. Subject-matter jurisdiction is the requirement that a given court have the power to hear the specific kind of claim that is brought to that court. Most state courts are courts of general jurisdiction and can hear virtually any claim arising under federal or state law, except those that are exclusively the jurisdiction of federal courts. Each state court likely has subject matter jurisdiction to hear cases involving the application of that state’s money transmission acts or statutes.
Whether there is personal jurisdiction in any particular state court related to money transmission claims will require that state to establish one of in personam jurisdiction, in rem jurisdiction, or quasi in rem jurisdiction. The latter two, in rem and quasi-in rem relate to property in question. In personam refers to court’s power to adjudicate matters directed against a party. A court with jurisdiction over a particular location may exercise in personam jurisdiction over a person who resides, maintains connections, or is served notice of legal proceedings in that location. It may also exercise jurisdiction over a person who consents to be subject to it. State courts can attach personal jurisdiction over out-of-state businesses if the business has engaged in at least a small but significant amount of activity that constitutes a minimum contact in the state. Minimum contacts can be created by making sales phone calls in a certain state or accepting online orders from an individual residing in that state.
Two seminal cases have determined there is only a very small and limited set of circumstances that could justify looking beyond the LLC’s state of incorporation or principle place of business and rather focusing on the individual members of the LLC’s citizenship to establish personal jurisdiction. See Goodyear Dunlop Tires Operations, S.A. v. Brown, 131 S. Ct. 2847, 2853–54 (2011), and Daimler AG v. Bauman, 134 S. Ct. 746, 757 (2014). In both of these cases, the court declined to look to the citizenship of all of the company’s members: “Neither Daimler nor MBUSA is incorporated in California, nor does either entity have its principal place of business there.” 
A handful of district courts have examined this issue and come to the same conclusion — that the test for personal jurisdiction over an LLC does not require an analysis of its member’s citizenship. In Carruth v. Michot, 2015 WL 6506550 (W.D. Tex. Oct. 26, 2015), Plaintiff argued that since a Texas citizen was a member of both the defendant LLCs, the LLCs must be “at home” in Texas and therefore Texas Courts had personal jurisdiction. The Court disagreed and held that it could not exercise personal jurisdiction based on the citizenship of a member. See also Finn v. Great Plains Lending LLC, 2016 WL 705242 (E.D. Pa. Feb. 23, 2016) (holding personal jurisdiction requires more than a company member residing in the state); see also Mountain Funding, LLC v. Blackwater Crossing, LLC, 2006 WL 1582403 (W.D.N.C. June 5, 2006) (“[T]he practice of disregarding a limited liability company as an entity and looking to the citizenship of its members is only used to determine whether a court has diversity for subject matter jurisdiction. This principal has not been applied to personal jurisdiction, which presents distinct due process issues.”).
NEW YORK’S JURISDICTION REACH PERTAINING TO THE BITLICENSE:
The New York State Department of Financial Services established the “BitLicense” that requires operations related to transactions involving any form of virtual currency to obtain a license from the state. 23 NYCRR 200. As stated in 23 NYCRR 200.3(a), “No Person shall, without a license obtained from the superintendent …, engage in any Virtual Currency Business Activity.” In 23 NYCRR 200.2(a)(i), a “person means an individual, partnership, corporation, association, joint stock association, trust, or other entity, however organized.”
The New York Department of Financial Services stated in their FAQ: “Is an out-of-state business required to obtain a BitLicense to engage in virtual currency business activity in New York State or with New York State residents? Yes. A business must obtain a BitLicense if it engages in virtual currency business activity involving New York State or persons that reside, are located, have a place of business, or are conducting business in New York.” A resident is “Any person that resides, is located, has a place of business, or is conducting business in New York.”
While New York’s definition is more expansive than some other states that often just consider Persons as businesses or individuals that are formed in the state, Bitfinex and Tether did a thorough job explaining how they took steps to avoid New York’s ability to attach such jurisdiction.
SUMMARY OF TEATHER & BITFINEX’S LACK OF JURISDICTION CLAIMS:
The OAG is saying they can’t evaluate the jurisdictional issues until they file the Martin Act lawsuit to reveal what conduct is at issue (for personal jurisdiction) and what types of virtual currencies or other products are at issue (for subject matter jurisdiction). According to Bitfiinex and Tether, the scope of the claims are already known, the OAG was already granted injunctive relief based on their claims having merit. By invoking the Court’s powers to obtain the discovery and enforce an injunction, they should not be able to then turn around and defer the jurisdictional issues that are foundational to the Court’s ability to award relief.
The main argument, other than the lack of proper service, is that the OAG cannot show Bitfinex and Tether engaged in any business activity purposefully directed at New York, rather the counterparties were actually foreign entities. Bitfinex and Tether also argued that the OAG has conceded that tethers do not qualify as securities or commodities under the Martin Act, therefore, the Court does not have subject matter jurisdiction. The last argument is that there is a presumption in New York law against applying statutes extraterritorially.
Bitfinex and Tether made convincing arguments based on New York caselaw that the jurisdictional questions needs to be addressed before any further action can be taken in the case. Additionally, the OAG’s arguments that Bitfinex and Tether found work-arounds specifically to avoid New York jurisdiction only bolsters the fact that Bitfinex and Tether did avoid availing themself to New York’s jurisdiction.
Instead, OAG offers a grab bag of miscellaneous and unrelated New York contacts, ignoring the required nexus “between the forum and the underlying controversy.” Bristol-Myers Squibb Co. v. Superior Court, 137 S. Ct. 1773, 1781 (2017). “When there is no such connection, specific jurisdiction is lacking regardless of the extent of a defendant’s unconnected activities in the State.” Id
Bitfinex and Tether’s argument that Bitfiinex does not trade commodities will be a challenging one considering they were fined $75,000 in June 2016 by the CFTC based on selling commodities without being registered with the CFTC. In their settlement, however, they did not admit or deny any allegations. Bitcoin has been considered a commodity by the CFTC since 2015, and it became caselaw when Judge Jack Weinstein of the Eastern District of New York wrote in his Order, “virtual currencies can be regulated by CFTC as a commodity.” Commodity Futures Trading Comm’n v. McDonnell, (E.D.N.Y. Mar. 6, 2018). Here, (if personal jurisdiction is granted and we get to this point), the scope may be limited to determining whether tether is a virtual currency/commodity, and not extended to the examination of all Bitfinex’s listed assets available for secondary trading. I personally think tether is a commodity, but that the Martin Act shouldn’t come into play because the case should be dropped for lack of personal jurisdiction.
SUMMARY OF HOEGNE’S AFFIRMATIONS:
Hoegne, the Canadian and American lawyer acting as General Counsel to both Bitfinex and Tether, (who I am in awe of after reading all of his masterful work in these pleadings) affirmed that both Bitfinex and Tether have a section in their terms of service stating they only transact with Eligible Contract Participants (“ECPs”) that are foreign entities. Bitfinex and Tether’s customers are the foreign entities themselves, and none of these ECPs are New York entities.
Some of the allegations made by the OAG’s Memorandum of Law and the Whitehurst Affirmation apparently contain a number of misleading statements involving Bitfinex and Tether’s relations to New York such as:
OAG alleged Bitfinex and Tether invested in an affiliate of Noble Bank, operated from New York. Hoegne says the relevant entity is based in Delaware, and the transaction had nothing to do with Tether.
OAG alleged Bitfinex and Tether loaned tether to a New York based firm. Hoegne says the borrower was actually a foreign entity and has been fully paid back as of April 2019.
OAG alleged Bitfinex and Tether opened an account with a New York based virtual currency trading firm that is licensed by New York Dept. of Financial Services. Hoegne says this account was opened for administrative purposes only and did not involve any trading of tether.
OAG alleged Bitfinex and Tether helped New York traders establish foreign shell entities so they could become account holders — creating a work-around the “ban” of New York customers. Hoegne says this was not a work-around, rather the only way to comply with the company’s terms of service. The companies were not “nominal” or “shell” customers.
OAG alleged Bitfinex and Tether made representations to a New York trading firm recommending they use Crypto Capital to expedite withdrawals. Hoegne says it was actually a United Kingdom entity, and they never recommended using Crypto Capital. The statement in question was also made in October of 2018, before Bitfinex and Tether proactively informed law enforcement about their issues and concerns relating to Crypto Capital.
OAG alleged Bitfinex and Tether onboarded the virtual currency firm Galaxy Digital LP located in New York. According to Hoegne, the New York address is the office address, but the entity is actually a foreign entity
OAG alleged Bitfiinex had log-ins by a New York trading firm. Hoegne says that firm is a foreign entity.
OAG alleged One of Bitfiinex and Tether’s most senior executives’ resident and conducted work from New York. Hoegne says that executive left the Companies in the summer of 2018 and has nothing to do with current allegations. Further, where shareholders live has nothing to do with the OAG’s allegations as the events that allegedly impaired tether’s banking — all of which took place outside New York.
OAG alleged Tether’s terms of service did not specifically prohibit redemptions of tethers by individuals or entities in New York until November 2018. Hoegne says Bitfiinex banned all New York customers on January 30, 2017 and extended that prohibition on or about August 2017 to include all United States individual customers. In August 2018, Bitfinex barred all United States entities and corporate customers from transacting on the platform. Further, in November 2017, Tether ceased servicing customers other than Bitfinex and Tether revised its Terms of Service on January 1, 2018 to specifically prohibit issuances to any United States Customers, and then on November 27, 2018, extended that to prohibit all U.S. persons.
OAG alleged Bitfinex and Tether operated bank accounts with Metropolitan Commercial Bank (located in NY). According to Hoegne, those accounts were closed for Tether on February 28, 2019, and for Bitfinex on April 30, 2018.
OAG asserts personal jurisdiction because Bitfinex and Tether engaged New York Accounting and Law firms. Hoegne says those reviews were not published to the New York market, and vendor relationships have nothing to do with OAG’s allegations in this proceeding.
OAG alleged Tether was traded on Poloniex or Bittrex, accessible by New York consumers. Hoegne says Bitfinex and Tether have no control over the secondary market
OAG alleged that at least two tokens listed on Bitfinex are issued by New York-based companies. Hoegne says this assertion was not supported by any documentation or information as to what tokens the OAG was referring to, and that any tokens on Bitfinex are not considered Bitfinex or Tether’s customers and are unrelated to the OAG’s investigation.
Hoegne also stated that the IEO Tokens were not made available to the general public, not offered to any US customers or to foreign ECPs whose shareholders reside in the United States, and these tokens are not traded on Bitfinex platform by any United States person. These tokens will be burned if the money is ever recovered from Crypto Capital, and this arrangement does not bar Bitfinex from paying Tether to satisfy the current loan agreement between the companies. Bitfinex will use funds from its current business profits and funds raised through the IEO to repay Tether to satisfy the loan. In fact, on July 1, 2019, Bitfinex repaid $100 million of the outstanding loan, which evidences that Bitfinex is healthy, growing and the the OAG’s concerns over the “backing” of tether are unfounded.
It appears to be a strong jurisdictional argument to me, will be interesting to see how far the Court will go in terms of minimum contacts with the state of New York, for example, the argument that a New York bank is only used for administrative purposes, or that certain foreign entities are registered in Delaware, but if they have an office in New York, that could be enough to create the minimum contact. It will also be interesting to see how far back they will extend the relevant time period. As for the argument that Bitfinex and Tether established work-arounds, that just sounds like clever business planning.