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$1.4T Bitcoin Manipulation Case

August 16, 2022

Law360 (November 15, 2019, 3:58 PM EST) — Tether and Bitfinex responded Friday to a blockbuster proposed class complaint in New York federal court seeking more than $1.4 trillion in damages for alleged manipulation of the Bitcoin market, calling the allegations “simply preposterous.”

The pre-motion letter highlighted what Tether and Bitfinex say is a lack of direct injury caused by them to the group of longtime cryptocurrency investors who filed the suit on Oct. 6. It also addressed questions about an unpublished report that serves as a cornerstone of the complaint. Tether and Bitfinex note that the authors of what is known as the Griffin report updated it to reflect that manipulation of the Bitcoin market was caused by “one large player,” rather than Bitfinex or Tether, as had been previously alleged.

Central to the complaint are allegations that cryptocurrency exchange Bitfinex and Tether, the issuer of a “stablecoin” cryptocurrency of the same name, engaged in a “part-fraud, part-pump-and-dump, and part-money laundering” scheme, which eventually cost cryptocurrency investors $466 billion just between Jan. 6 and Feb. 6, 2018.

The letter notified the court of the intention to file a motion to dismiss the entire complaint.

“The allegation of manipulation is simply preposterous,” the letter said.

“I can’t understand the motivation of plaintiffs’ lawyers to rely on an unpublished non-peer-reviewed academic report as the basis for such a serious lawsuit,” Walden Macht & Haran LLP managing partner Jim Walden, who represents Bitfinex and Tether, told Law360.

The first version of the Griffin report, written by John Griffin of the University of Texas at Austin and Amin Shams of the Ohio State University and made public on the research network SSRN in June 2018, concluded that up to half of the Bitcoin price gains experienced in 2017 through early 2018 resulted from Tether-driven manipulation, the complaint outlines. The complaint alleges that the report showed that Bitfinex and Tether cooperated extensively to manipulate the Bitcoin market. A subsequent update the report, however, revised some of the conclusions to show that it was one player in the market that had engaged in the manipulation.

Plaintiffs’ counsel argues, however, that the new report “further proves” their claims.

“The analysis now shows that one player was primarily responsible for manipulating bitcoin markets, and Professor Griffin recently told the Wall Street Journal that ‘if it’s not Bitifinex, it’s somebody they do business with frequently’ — e.g. Tether,” Kyle W. Roche of Roche Freedman LLP, who represents the investors, told Law360 in an email.

In their complaint, investors David Leibowitz, Benjamin Leibowitz, Jason Leibowitz, Aaron Leibowitz and Pinchas Goldshtein bring various causes of action under the Commodity Exchange Act and Racketeer Influenced and Corrupt Organizations Act statutes, including market manipulation. Bitfinex and Tether share some personnel and have overlapping ownership from iFinex Inc., which is also named in the suit.

Bitfinex, Tether and others named in the complaint could be liable for more than $1.4 trillion if damages are tripled as required by the RICO and antitrust statutes, the investors say.

The class period outlined in the complaint spans from Oct. 6, 2014, when Tether was first issued, to the present, and the plaintiffs seek to include any “persons or entities” that either transacted in or held cryptocurrencies during that period. The complaint suggests that number could reach into the tens of thousands.

Some stablecoins are advertised as cryptocurrencies backed one-to-one by fiat currency, which should keep the value of the token, in this case Tether, more stable than other cryptocurrencies that can experience wild swings in price.

Friday’s letter argued that, given Tether only issued $1.2 billion of its currency during the “bubble period” from March to December 2017 and a total of $860 billion worth of Bitcoin was traded on more than 30 exchanges during that period, any activity by Tether and Bitfinex to manipulate the market would not have had a significant effect on the price of Bitcoin.

“The [Tether] issuances represent less than 1/6 of one percent of the bitcoin total trade volume during the bubble, making plaintiffs’ core theory impossible to sustain,” the letter said.

The scheme, as outlined in the complaint, allowed “Tether and Bitfinex [to] purchase bitcoin with fake [tethers] to draw in momentum investors then cash out by selling it to them for real U.S. dollars.”

Friday’s letter said that an updated version of the Griffin report, which undergirds the complaint, “walked back a key allegation” that instead of the manipulation being directed by Bitfinex and Tether, the “findings are ‘consistent with one large player’ — i.e., a customer.”

“This concession negates any compelling inference of defendants’ fraudulent intent — or even manipulative conduct,” the letter said.

“There are hundreds of thousands of people, millions of people, that rely on the crypto ecosystem, and to take such a heavy-handed shot at all of their investments based on this kind of evidence seems to me to be highly problematic,” Walden said.

However, Velvel Freedman of Roche Freedman told Law360 in an email that a case like this would be good in the long run.

“Fraud and price manipulation have been detrimental to the class and widespread adoption of cryptocurrencies,” he said. “Claims like these are good for the long-term future of cryptocurrency, as it will deter future bad acts and help make the class whole.”

The proposed class action comes amid New York Attorney General Letitia James’ claims that Bitfinex and Tether lied about the nature of Tether. James’ office is alleging Bitfinex moved more than $1 billion of “wrongfully co-mingled client and corporate deposits,” which included some from New York, to Panama-based Crypto Capital Corp. in 2018, an entity also named in the class action complaint.

Claiming the shortfall was covered by at least $700 million that was supposed to be used to back Tether’s currency, James sought to freeze a $900 million line of credit between Bitfinex and Tether, and she demanded documents related to a subpoena she served on the companies in November. The entities have denied James’ allegations.

The investors are represented by Velvel Freedman, Kyle W. Roche and Joseph M. Delich of Roche Freedman LLP.

Tether and Bitfinex are represented by Jim Walden of Walden Macht & Haran LLP, Michael J. Lee of the Law Office of Michael J. Lee and Sunjina Ahuja of Dillon Miller Ahuja LLP.

The case is David Leibowitz et al. v. iFinex Inc. et al., case number 1:19-cv-09236-KPF, in the U.S. District Court for the Southern District of New York.