Case 1:19-cv-09236-KPF Document 28 Filed 11/15/19 Page 1 of 4

Walden Macht & Haran LLP

One Battery Park Plaza, 34th Floor

New York, NY 10004
212 3352030
November 15, 2019
VIA ECF and E-Mail
Hon. Katherine Polk Failla
U.S. District Court, S.D.N.Y.
40 Foley Square, Room 2103
New York, NY 10007

Re: Leibowitz et al. v. iFinex Inc., et al., 19-CV-09236-KPF (pre-motion letter)

Dear Judge Failla:

On behalf of Defendants Tether Holdings Limited, Tether Operations Limited, and Tether
International Limited ("Tether"), as well as Defendants iFinex Inc., BFXNA Inc., BFXWW Inc.,
and DigFinex Inc. (together with Tether, the "Defendants"), we respectfully submit this pre-motion
letter to request permission to file a motion to dismiss Plaintiffs' complaint in its entirety, and to
request a pre-motion conference to set a briefing schedule. Plaintiffs do not consent to our motion.

Tether issues a cryptocurrency called "tether" ("USDT"), which traders rise to purchase
other cryptocurrencies. USDT is a "stablecoin" pegged to the U.S. dollar and redeemable at Tether
for U.S. dollars on a 1: 1 basis. Defendants BFXNA Inc., BFXWW Inc., and iFinex Inc. operate
Bitfinex, an exchange where customers can deposit, trade, and withdraw USDT and other
cryptocurrencies. DigFinex Inc. ("DigFinex") is a part owner of Tether Holdings Limited and
iFinex. Plaintiffs allege (1) Defendants falsely represented that USDT is fully "backed" by
reserves, when no such reserves purportedly existed, (2) Defendants "manipulated" bitcoin prices
in 2017 and 2018 by issuing $2.5 billion of "unbacked" USDT and purchasing bitcoin during
market downturns, and (3) the bitcoin market thereafter crashed, resulting in bitcoin prices being
lower than they would be otherwise (but higher than they were before the "bubble"). 1
Significantly, Plaintiffs do not allege they personally purchased USDT or transacted on Bitfinex.
Nonetheless, Plaintiffs assert claims under the various statutes described below.

Although the Court must accept these allegations as true on a motion to dismiss, healthy
skepticism of this case is warranted for three reasons. First, the Complaint conveniently omits
published analyses concerning the causes of the spike in the bitcoin price in 2017, which have
nothing to do with Defendants' actions. Second, Plaintiffs' "proof' of Defendants' alleged
manipulation of bitcoin comes from a draft, unpublished academic paper (the "Griffin Report"),
whose authors-as described below-have since walked back a key allegation underlying this
lawsuit in a subsequent version of their paper. Third, the allegation of manipulation is simply
preposterous: Plaintiffs allege that, in the "bubble period" of March to December 2017, Tether
issued $1.2 billion USDT. During this same period, however, total bitcoin trading exceeded $860
billion on more than 30 different exchanges. Thus, the USDT issuances represent less than 1/6 of

1 Defendants deny these claims and will show, at an appropriate time if necessary, that many of the most prejudicial
and hyperbolic allegations in the complaint were intended for PR value more than substantive evidentiary purposes.
 Case 1:19-cv-09236-KPF Document 28 Filed 11/15/19 Page 2 of 4

one percent of the bitcoin total trade volume during the bubble, making Plaintiffs' core theory
impossible to sustain. The Court need not reach these issues given the manifest problems with the
pleadings. The grounds for dismissal we intend to raise include the following:

CEA Claims. The elements of a market manipulation claim are: (1) Defendants had an
ability to influence market prices; (2) an artificial price existed; (3) Defendants caused the artificial
price; and (4) Defendants specifically intended to cause the artificial price. Harry v. Total Gas &
Power N. Am., Inc., 244 F. Supp. 3d 402, 412 (S.D.N.Y. 2017), ajf'd as modified, 889 F.3d 104
(2d Cir. 2018). To establish "intent," Plaintiffs must allege facts that "give rise to a strong
inference of fraudulent intent." Eternity Glob. Master Fund Ltd. v. Morgan Guar. Tr. Co. ofN. Y.,
375 F.3d 168, 187 (2d Cir. 2004). That inference "must be more than merely 'reasonable' or
'permissible'-it must be cogent and compelling, thus strong in light of other explanations."
Tellabs, Inc. v. Makar Issues & Rights, Ltd., 551 U.S. 308,324 (2007). In addition, Plaintiffs must
allege they suffered an actual injury as a result of their transactions. Harry v. Total Gas & Power
N. Am., Inc., 889 F.3d 104, 111 (2d Cir. 2018).

Here, although the original Griffin Report essentially blamed Tether and Bitfinex for
manipulating bitcoin prices, the updated "Griffin Report" (which is still unpublished, but was
publicly released) concedes that its supposed findings are "consistent with one large player"-i. e.,
a customer-"purchasing Tether with cash at Bitfinex and then exchanging it for Bitcoin." This
concession negates any compelling inference of Defendants' fraudulent intent--or even
manipulative conduct. Further, Plaintiffs have not alleged an actual injury, offering only the
threadbare and conclusory allegation that "[t]he fallout continues to affect the cryptocurrency
market, including by causing prices to be lower than they would have been but for the
manipulation." (Compl. il 10.) In addition, the behavior described-buying bitcoin on market
downturns-is "a trading pattern supported by a legitimate economic rationale"-precluding
liability as a matter of law. Miller v. Pac. Inv. Mgmt. Co. LLC, No. 12-cv-4122, 2013 WL
12305507, at *3 (S.D.N.Y. Apr. 23, 2013). 2

Antitrust Claim. A Sherman Act§ 2 violation requires: (1) possessing monopoly power,
i.e. the power to control prices or exclude competition in the relevant market, and (2) acquiring
that power willfully rather than through superior product, business acumen, or historic accident.
Verizon Commc'ns Inc. v. Law Offices of Curtis V. Trinka, LLP, 540 U.S. 398,407 (2004). Here,
Plaintiffs conflate two distinct markets, alleging that Tether (a) has a "stablecoin" monopoly,
which (b) somehow enables Defendants to exclude competition across the entire cryptocurrency
market. (Compl. ilil 273-74.) Yet Plaintiffs nowhere allege (much less plausibly offer prooj) that
Defendants (a) can prevent competitors from issuing stablecoins, (b) acquired any such power
willfully and unlawfully, or (c) can restrict competition across the entire universe of non-USDT
cryptocurrencies. Plaintiffs also fail to allege antitrust injury, i.e., losses flowing from
anticompetitive conduct. Atlantic Richfield Co. v. USA Petroleum, Inc., 495 U.S. 328,337 (1990).

RICO Claim. To state a RICO claim, a Plaintiff must allege, inter alia, that Defendants
engaged in the conduct of an enterprise, through a pattern of racketeering activity, which was the

2 In addition, a transaction in futures contracts is required for a private cause of action under the CEA. See 7 U.S.C.
§ 25(a)(l). Only one Plaintiff alleges he transacted in bitcoin futures, and he fails to allege Defendants manipulated
the price of any identifiable contract.

Page2
 Case 1:19-cv-09236-KPF Document 28 Filed 11/15/19 Page 3 of 4

proximate cause of injuries to Plaintiffs. See Town ofW Hartford v. Operation Rescue, 915 F.2d
92, 100 (2d Cir. 1990). Although we will address these elements in our motion, the RICO claim
has two glaring defects. First, Plaintiffs do not allege injury to their person or property, i.e., an
actual, out-of-pocket financial loss. Westchester Cty. Indep. Party v. Astorino, 137 F. Supp. 3d
586,613 (S.D.N.Y. 2015). Second, Plaintiffs do not allege "but for" and proximate causation. See
Anza v. Ideal Steel Supply Corp, 547 U.S. 451,457 (2006).

Common Law Fraud Claim: The elements of common-law fraud are: "(1) the defendant
made a material false representation, (2) the defendant intended to defraud the plaintiff thereby,
(3) the plaintiff reasonably relied upon the representation, and (4) the plaintiff suffered damage as
a result of such reliance." Newman v. Family Mgmt. Corp., 530 F. App'x 21, 24 (2d Cir. 2013).
Here, Plaintiffs fail to allege facts establishing a compelling inference of fraudulent intent. Further,
even assuming Defendants made any material misrepresentation (which Defendants deny),
Plaintiffs do not allege actual reliance upon any such misrepresentations even in conclusory
fashion, which is fatal to their claim. SRM Glob. Master Fund Ltd. P 'ship v. Bear Stearns
Companies L.L.C., 829 F.3d 173, 177-78 (2dCir. 2016). Plaintiffs similarly fail to allege: (a) that
Defendants' conduct caused Plaintiffe to enter any transactions; (b) that any revelation by or about
Defendants caused Plaintiffs to suffer a loss; or even (c) a specific identifiable loss that Plaintiffs
suffered because of Defendants' actions. Plaintiffs thus fail to either allege transaction causation
and loss causation, see Laub v. Faessel, 297 A.D.2d 28, 31 (1st Dep't 2002), or damages, i.e., an
out-of-pocket loss. Lama Holding Co. v. Smith Barney Inc., 88 N.Y.2d 413, 421-22 (1996).

GBL § 349 Claims. The elements of a GBL § 349 claim are: (1) "the challenged act or
practice was consumer-oriented"; (2) "it was misleading in a material way"; and (3) "the plaintiff
suffered injury as a result of the deceptive act." Pulse Creations, Inc. v. Vesture Grp., Inc., 154 F.
Supp. 3d 48, 58 (S.D.N.Y. 2015). Courts have "routinely rejected attempts to apply GBL § 349
to securities transactions and other financial transactions," which do not involve consumer
products. JPMorgan Chase Bank, NA. v Controladora Comercial Mexicana S.A.B. De C. V., No.
603215/18, 2010 WL 4868142, at *12 (N.Y. Sup. Ct. Mar. 16, 2010). Such rulings, and their
underlying rationale, apply equally here. Further, Plaintiffs fail to allege that: (a) Plaintiffs
received a deceptive statement made by Defendants, (b) actual injury, or (c) that they "suffered
actual injury caused by a materially misleading act, not that a misleading act led to further steps
which eventually harmed them." Frintzila v. DirectTV, LLC, 731 F. App'x 71, 72 (2d Cir. 2018)
(emphasis added).

Dismissal ofDigFinex. DigFinex, an alleged corporate parent of two other Defendants, is

a BVI company. (Compl. 120.) The Complaint alleges no conduct in the U.S. by or on behalf of
DigFinex other than opening a New York bank account. (Id 1173.) Because the Complaint does
not link that account to any of the alleged conduct, this allegation fails to establish any basis either
for personal jurisdiction or substantive liability. Further, even assuming the Tether and Bitfinex
Defendants are subject to personal jurisdiction (an issue as to which Defendants reserve their
rights), that alone does not subject DigFinex, as a parent entity, to personal jurisdiction (see Jazini
v. Nissan Motor Co., 148 F.3d 181, 184 (2d Cir. 1998), nor is corporate parent status standing
alone a basis for substantive liability. 3

3In filing a motion to dismiss, Defendants will also move to strike certain prejudicial and irrelevant paragraphs oftbe
Complaint.

Page3
 Case 1:19-cv-09236-KPF Document 28 Filed 11/15/19 Page 4 of 4

Respectfully submitted,

I
I
I
Law Offi s of Michael Jason Lee
__
l b ~_ I.U1-_Im_
B : Michael J~ Lee .µ
Dillon Millel" Ahuja LLP

~ ~ - -----
By: Sunjina Ahuja

cc: All counsel (via ECF}

Page4