A recent decision by the state appellate court in Manhattan in the New York AG’s long-running investigation into the virtual currency “tether” reaffirms the strength and breadth of the office’s investigative powers under New York’s Martin Act.
The Martin Act, New York’s so-called “blue sky” anti-fraud law, Article 23-A of the General Business Law (“GBL”), has long been one of the most powerful tools in the New York AG’s arsenal. It prohibits, inter alia, fraud in connection with the offer, sale or purchase of securities and commodities within or from New York. High-profile enforcement actions under the Martin Act earned a former New York AG the sobriquet “the Sheriff of Wall Street” in the early 2000s. In the post financial crisis era, the Martin Act was deployed in connection with the federal-state Residential Mortgage Backed Securities (RMBS) Working Group, co-chaired by the New York AG. However, in 2018, during her campaign for office, Attorney General Letitia James told the New York Times, “It’s really critically important that I not be known as the ‘Sheriff on Wall Street,’” in recognition of the variety of important issues deserving of the office’s attention. She observed at the time, “The attorney general cannot be a one-trick pony. I will be laser-focused on taking on Wall Street abuses—I don’t need a moniker for that.”
The July 9, 2020 decision by the First Department, Appellate Division, in In re Letitia James v. iFinex Inc. reflects the New York AG’s focus not only on policing traditional Wall Street players like banks, but also on finding novel and aggressive ways to wield Martin Act authority in the FinTech sector.
The New York AG is conducting an investigation concerning representations about the cash reserves backing tether, currently the most traded “stablecoin” currency, and the relationship between the companies that issue tether and their corporate affiliate Bitfinex, a virtual currency trading platform. Stablecoins are cryptocurrencies designed to experience less price volatility than other cryptocurrencies, such as bitcoin, by being pegged to the value of some “stable” asset, such as the US dollar or a precious metal. According to the New York AG, Bitfinex transferred over $850 million in co-mingled client and corporate funds to a Panamanian entity that may have lost or absconded with the funds. To handle customer withdrawals, Bitfinex allegedly swapped these missing deposits for the cash reserves backing tether. In April 2019, the New York AG obtained an order pursuant to Section 354 of the GBL requiring the entities that operate the Bitfinex platform and issue tether to produce documents and testimony under oath in connection with the office’s investigation. On appeal, the respondents challenged the New York AG’s authority to conduct its investigation for lack of personal and subject matter jurisdiction.
In rejecting the appeal, the First Department’s decision underscored the New York AG’s broad authority to investigate securities and commodities fraud under the Martin Act, and held that virtual currencies like tether are commodities within the scope of the statute.
First, noting that the Martin Act prohibits fraud in connection with the offer or sale of commodities “within or from” New York (Section 352 of the GBL), the Court found that the New York AG had multiple bases for exercising its investigative jurisdiction, even though the respondents are incorporated abroad. These included that, within the six-year lookback period under the applicable statute of limitations: New York-based customers were permitted to trade tether on the Bitfinex platform; one of respondents’ executives had resided in and conducted business from New York; and the entities had used bank accounts in New York. (Order at 10-12.) The Court also observed that it was not improper for the New York AG to use a Section 354 order to develop evidence that a company under investigation is in fact doing business in New York. (Id. at 13.) Finally, the Court noted the New York AG can establish personal jurisdiction necessary to exercise its investigative authority by “a far lighter showing” than is required to bring a lawsuit. (Id. at 13.)
Second, summarily rejecting the argument that tether does not fall within the scope of the Martin Act, the Court found that the virtual currency is “easily encompassed” by the statute’s definition of “commodity” and therefore is within the New York AG’s subject matter jurisdiction. (Id. at 8 n.2.) The Court pointed to prior determinations by federal courts and the US Commodities Futures Trading Commission (“CFTC”) that virtual currencies are commodities under the federal Commodities Exchange Act, “which defines the term more narrowly than does the Martin Act.” (Id. at 8.)
The takeaway: the decision is a timely reminder to companies and individuals in the FinTech sector that the New York AG has broad power to investigate suspected fraud in the realm of virtual currencies. Dealing with the New York AG’s Investor Protection Bureau may be a disorienting experience for white collar practitioners used to responding to inquiries by federal regulators. The text of the Martin Act places few clear limits on the New York AG’s investigative authority, and the office is not constrained by the large body of guidance memorialized in the US Department of Justice’s manual for prosecutors and other published federal enforcement guidelines that help practitioners attempt to deal with regulators on a level playing field. Ultimately, the New York AG’s investigation may have implications for the popularity of tether, which remains the most traded stablecoin but which faces growing competition from other cryptocurrencies, such as USD Coin and Gemini Dollar.