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Tether, Bitfinex Must Face Crypto Market Manipulation Claims

Law360 (September 29, 2021, 5:56 PM EDT) — Crypto asset buyers can pursue many of their claims that the company behind cryptocurrency exchange Bitfinex and the stablecoin tether manipulated the digital asset market and artificially inflated prices, a New York federal court found Tuesday.

DigFinex Inc. and other cryptocurrency companies will have to face several claims that they violated antitrust laws and the Commodity Exchange Act by issuing unbacked tether tokens and strategically purchasing crypto assets in order to prop up prices. But the defendants escaped civil RICO claims, according to Tuesday’s order.

A proposed class of “cryptocommodity” buyers said they purchased assets such as bitcoin and ether at artificially inflated prices, before prices plummeted in 2018. They’ve adequately alleged anticompetitive efforts at price control, although they’ll have to go on to show their claims are true, U.S. District Judge Katherine Polk Failla found.

“Plaintiffs have plausibly alleged conduct from which the court can draw a reasonable inference of the DigFinex defendants’ intent to control prices, and thus to ‘constrain the market for other buyers and sellers’ of cryptocommodities,” the order said.

The allegations are spearheaded by a proposed class of digital asset buyers including New York residents David, Benjamin and Jason Leibowitz. One of the main targets of the allegations is DigFinex Inc. and various affiliated entities. DigFinex is the parent company behind crypto-asset exchange Bitfinex as well as Tether and its namesake stablecoin, tether, which is advertised as a digital token pegged to the U.S. dollar.

Tether, when it was first issued, was the main stablecoin in the digital asset space, and the Leibowitzes argued this put DigFinex entities in a position to manipulate the digital commodity market. The plaintiffs alleged that instead of being backed by U.S. dollars in reserve, billions of dollars of tether were issued “out of thin air.”

Bitfinex and Tether entities allegedly then transferred the tether to other exchanges and made hefty, strategic purchases of cryptocurrencies when prices threatened to drop, simulating the appearance of a price floor, the complaint said.

The alleged maneuver “artificially simulat[ed] organic demand and creat[ed] a ‘colossal bubble’ in the cryptocommodity market,” the plaintiffs said in their complaint.

The complaint also names DigFinex executives, a payment processor called Crypto Capital Corp., former NFL investor Reginald Fowler and a pair of other cryptocurrency exchanges, which are accused of furthering the alleged scheme despite ostensibly being Bitfinex competitors.

Fowler, a former investor in the Minnesota Vikings NFL team, is accused of knowingly participating in the scheme alongside Crypto Capital. The court found Tuesday that it did have jurisdiction over him, despite his Arizona residence. Fowler is facing related claims from prosecutors alleging he acted as an unlicensed money transmitter and lied to banks.

Fowler could not immediately be reached for comment on Wednesday.

While the majority of the Leibowitzes’ market manipulation claims can also proceed, Judge Failla said their RICO claims were too tenuous.

“The causal connection between defendants’ purported racketeering and plaintiffs’ injury is insufficiently ‘direct’ and ‘straightforward'” to satisfy the requirements for a RICO claim, the order said.

Tether on Wednesday put out a statement celebrating the dismissal of the RICO claims and saying the remainder of the case is “now in shambles.”

“Even for the remaining claims, the court’s order raises substantial issues that will ultimately be fatal to the plaintiffs’ case,” the statement said, adding that the claims are “meritless.”

“Bitfinex and Tether look forward to litigating this case and won’t settle what remains of the plaintiffs’ baseless claims,” Tether said. “Litigation will expose this case for what it is: a clumsy attempt at a money grab, which recklessly harms the whole cryptocurrency ecosystem.”

Jim Walden of Walden Macht & Haran LLP and Michael J. Lee of the Law Offices of Michael Jason Lee APLC, who are representing the DigFinex entities, said they were pleased at the dismissal of the “frivolous” RICO claims, adding that the plaintiffs will have an uphill climb to actually prove the remaining claims. 

“The court’s decision to keep the other claims alive was hardly an endorsement of the claims: the court repeatedly called out the challenges of sustaining them and the reasonable counterarguments and inferences raised by the defendants’ motions,” Walden and Lee said in an emailed statement to Law360 on Wednesday. 

Under the weight of discovery, “the case will fold,” Walden and Lee said. 

Counsel for the plaintiffs did not immediately respond to requests for comment on Wednesday.

The plaintiffs are represented by Andrew R. Dunlap, Caitlin Halligan and Philippe Z. Selendy of Selendy & Gay PLLC, Kyle W. Roche, Edward Normand, Velvel Freedman and Joseph M. Delich of Roche Freedman LLP, and Todd M. Schneider, Jason H. Kim, Matthew S. Weiler and Kyle G. Bates of Schneider Wallace Cottrell Konecky LLP.

DigFinex and the Bitfinex and Tether entities are represented by Jim Walden, Daniel J. Chirlin, Daniel A. Cohen and Veronica M. Wayner of Walden Macht & Haran LLP and Michael Jason Lee of the Law Offices of Michael Jason Lee APLC.

Fowler is representing himself.

–Additional reporting by Dean Seal and Pete Brush. Editing by Philip Shea.

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