MATTER OF JAMES v. IFINEX INC

OPINION OF THE COURT

GESMER, J.

This case raises important issues about the scope of the authority of petitioner, the Attorney General of the State of New York, to investigate fraud under the Martin Act. The trial court properly rejected the attempts by respondents to limit petitioner's lawful authority to protect New York residents.

Respondents BFXNA Inc. and BFXWW Inc. are wholly-owned subsidiaries of respondent iFinex Inc. (collectively iFinex). iFinex operates a trading platform known as Bitfinex on which virtual currencies can be exchanged. Respondent Tether Holdings Limited is the holding company for respondents Tether Limited, Tether Operations Limited, and Tether International Limited (collectively Tether Holdings). Tether Holdings's main activity is to issue a virtual "stablecoin" currency known as "tether" (referred to below as tether). Stablecoin is a type of virtual currency that is designed to minimize price volatility by being pegged to a stable asset or currency. Until on or about March 4, 2019, respondent Tether Holdings's represented that every tether is "backed" by one US dollar, and any holder of tether may redeem it for one US dollar at any time. After that date, Tether Holdings changed its representation on its website to state that, while every tether is still valued at one US dollar, tether is backed by Tether Holdings's "reserves," which include unspecified currency, "cash equivalents," and "other assets and receivables from loans made by Tether [Holdings] to third parties," including to affiliated entities.

Nonparty Digfinex Inc. is the majority owner of iFinex and Tether Holdings. A small group of executives and employees, some of whom are or have been located in New York, operates all respondents. Each of the respondents is incorporated outside of the United States and does not have a central headquarters, and none is registered for service of process in New York.

In November 2018, petitioner commenced an investigation of respondents pursuant to the Martin Act, which gives the Attorney General "broad regulatory and remedial powers" to "investigat[e] and interven[e] at the first indication of possible... fraud on the public and, thereafter, if appropriate, to commence civil or criminal prosecution" (Assured Guar. [UK] Ltd. v J.P. Morgan Inv. Mgt. Inc., 18 N.Y.3d 341, 350 [2011] [internal quotation marks omitted]; see General Business Law § 352[1]). Petitioner began the investigation as a result of her concern that respondents lacked sufficient liquidity to permit customers to redeem tether at the represented value.

Petitioner served subpoenas on third parties pursuant to the Martin Act (General Business Law § 352) and Executive Law § 63(12), seeking information regarding respondents' activities. After learning of this, respondents' counsel contacted petitioner on November 3, 2018, and agreed to accept service of subpoenas by email on behalf of respondents. Petitioner then delivered subpoenas seeking information and documents from January 1, 2015, forward. Respondents' counsel accepted service of the subpoenas and produced some of the requested documents and information.

In early 2019, petitioner's investigation revealed information that respondents had not disclosed to her, although it came within the scope of the information sought by the subpoenas. Respondents had previously explained to petitioner that many banks and other traditional financial institutions will not do business with unregulated or offshore companies dealing in virtual currency. As a result, beginning in 2014, iFinex had used a third-party foreign entity to process customer deposits and withdrawals. In or about February 2019, petitioner learned that, since mid-2018, this entity had refused to provide iFinex with close to $1 billion of their commingled client and corporate funds. In addition, respondents advised petitioner that, in November 2018, Tether Holdings had transferred $625 million to iFinex, and that iFinex was planning to take a $900 million line of credit from Tether Holdings. Petitioner expressed concern that the latter transaction might constitute a conflict of interest, but respondents nevertheless went ahead with the transaction and only told petitioner that they had done so after the deal had closed.

Concerned that these events indicated that iFinex was in serious financial trouble, that Tether Holdings's cash reserves backing tether would be dissipated, and that respondents had misled their customers in relation to these events, petitioner sought an order pursuant to General Business Law § 354. That provision of the Martin Act permits the Attorney General to seek an ex parte order in Supreme Court requiring the subjects of an investigation to produce documents and testify under oath, and authorizes the court to issue a "preliminary injunction or stay as may appear to [it] to be proper and expedient" (General Business Law § 354). In response to petitioner's request, Supreme Court issued an ex parte order dated April 24, 2019, which directed respondents to produce certain documents and stayed them from (1) taking any further action to "make any ... claim ... on the U.S. dollar reserves held by Tether [Holdings]"; (2) making any payments to any individual associated with respondents "from the U.S. dollar reserves held by Tether [Holdings]"; and (3) altering or destroying any documents related to the investigation. Petitioner served the ex parte order on respondents, pursuant to its terms, by sending a copy of it, together with the papers on which it was based, to respondents' counsel by email, overnight delivery and hand delivery.

On or about April 30, 2019, respondents moved to modify or vacate the ex parte order. By order dated May 16, 2019, Supreme Court granted respondents' motion in part by modifying the temporary restraining order, but denied their motion to vacate it.1

On or about May 21, 2019, respondents made the instant motion, which they style as a motion to dismiss on the basis of lack of subject matter jurisdiction (CPLR 3211[a][2]) and lack of personal jurisdiction (CPLR 3211[a][8]). Supreme Court denied the motion by order entered on August 19, 2019, and respondents now appeal.

At the outset, under the Martin Act's statutory scheme, once Supreme Court has issued an order responding to a General Business Law § 354 application, it has no further role in the Attorney General's investigation, except to rule on a motion by either party to vacate or modify the order, as respondents made here. Accordingly, once the court issued the order authorized by General Business Law § 354 on April 24, 2019, and modified it by order dated May 16, 2019, the proceeding before it was concluded and there was no action or proceeding for Supreme Court to "dismiss" on May 21, 2019, when respondents filed their motion that resulted in the order now before the Court. All that remained was the Attorney General's ongoing investigation, in which, by statute, the courts have no further role at this stage. Indeed, neither party cites to, and this Court is unaware of, any prior case in which the subject of a Martin Act investigation has moved to "dismiss" an application by the Attorney General for an order pursuant to General Business Law § 354. Nevertheless, I consider each of respondents' three arguments in support of their appeal of the motion court's August 19, 2019 order, and reject each for the reasons discussed below.

First, respondents argue that tether does not qualify as a security or commodity as those terms are defined in the Martin Act, and that the motion court thus lacked subject matter jurisdiction over them. I disagree for three reasons. As an initial matter, Supreme Court has broad general original jurisdiction, including to hear applications by the Attorney General for orders pursuant to General Business Law § 354 under the Martin Act. Accordingly, as the motion court correctly found, respondents' challenge is actually to petitioner's authority to investigate their activities, rather than the court's jurisdiction to hear a General Business Law § 354 application.

Moreover, the May 16, 2019 order on respondents' motion to vacate or modify the ex parte order rejected respondents' subject matter jurisdiction argument. Respondents failed to appeal from that order.

Finally, even if the Court were to consider respondents' argument on the merits, the Martin Act's definition of commodities as including "any foreign currency, and any other good, article, or material" (General Business Law § 359-e[14][a][i]) is broad enough to encompass tether.2 Indeed, federal courts and the Commodities Futures Trading Commission have found that virtual currencies are commodities under the Commodities Exchange Act, which defines the term more narrowly than does the Martin Act ("all other goods and articles ... and all services, rights, and interests ... in which contracts for future delivery are presently or in the future dealt in" [7 USC § 1a(9) (emphasis added)]; Commodity Futures Trading Commn. v McDonnell, 287 F.Supp.3d 213, 224-226 [ED NY 2018]; Matter of Coinflip, Inc., 2015 WL 5535736, *2, 2015 CFTC LEXIS 20, *6 [Sept. 17, 2015, CFTC Docket No. 15-29]).

Accordingly, the motion court properly denied the branch of respondents' motion to dismiss based on subject matter jurisdiction.

Next, respondents argue that Supreme Court lacked specific personal jurisdiction over them because petitioner failed to demonstrate a sufficient connection between respondents' activity in New York and the activities she is investigating. This argument is unavailing.

On a motion pursuant to CPLR 3211(a)(8) to dismiss for lack of personal jurisdiction, the party asserting jurisdiction has the burden of demonstrating "satisfaction of statutory and due process prerequisites" (Stewart v Volkswagen of Am., 81 N.Y.2d 203, 207 [1993]). Under CPLR 302(a)(1), New York's long-arm jurisdiction statute, "proof of one transaction in New York is sufficient to invoke jurisdiction, even though the defendant never enters New York, so long as the defendant's activities here were purposeful and there is a substantial relationship between the transaction and the claim asserted" (Deutsche Bank Sec., Inc. v Montana Bd. of Invs., 7 N.Y.3d 65, 71 [2006] [internal quotation marks omitted], cert denied 549 U.S. 1095 [2006]). Due process is satisfied when a foreign entity has "minimum contacts" with the state and exercise of jurisdiction does not "offend traditional notions of fair play and substantial justice" (International Shoe Co. v Washington, 326 U.S. 310, 316 [1945] [internal quotation marks omitted]; see also LaMarca v Pak-Mor Mfg. Co., 95 N.Y.2d 210, 216 [2000]). It is "rare" for personal jurisdiction to be permitted under the long-arm statute and prohibited by due process considerations (Rushaid v Pictet & Cie, 28 N.Y.3d 316, 331 [2016] [internal quotation marks omitted]). Moreover, "[w]here the purpose of the proceeding is to protect the citizens of the State from potentially dangerous consequences, less is required than might otherwise be the case" (Matter of La Belle Creole Intl., S.A. v Attorney-General of State of N.Y., 10 N.Y.2d 192, 198 [1961]).

Here, petitioner is investigating, inter alia, whether respondents have committed fraud (as broadly defined in the Martin Act) "within or from" New York (General Business Law § 352) by making untrue claims about the cash reserves backing tether and their ability to honor customer withdrawal requests. She has sought documents and information from respondents going back to 2015, which is well within the applicable six-year statute of limitations (CPLR 213[9]).

iFinex admits that it permitted New York-based customers to trade tether on the Bitfinex platform until January 30, 2017. Respondent Tether Holdings did not expressly prohibit redemption of tether by New York-based customers until November 27, 2018. Petitioner included in her motion papers documents obtained in her investigation indicating that New York-based customers nevertheless used the Bitfinex platform to trade tether after both of these dates, including as recently as May 14, 2019 (see Archer-Vail v LHV Precast Inc., 168 A.D.3d 1257, 1261-1262 [3d Dept 2019] [showing that the defendant operated an "interactive website" that made products available to New York customers was a "sufficient start" to showing of long-arm jurisdiction on motion to dismiss]).

In addition, respondents do not deny that, until at least early 2018, they had an executive who resided in and conducted business on their behalf within New York, including with customers who appear to be New York-based (see Kreutter v McFadden Oil Corp., 71 N.Y.2d 460, 467 [1988] [long-arm jurisdiction established where agent "engaged in purposeful activities in this State ... for the benefit of and with the knowledge and consent" of foreign corporation defendants]). While respondents claim that the customer involved in certain correspondence attached to petitioner's papers was a "United Kingdom entity," they do not deny that the entity acted through a representative located in New York.

Furthermore, respondents had active accounts with New York banks until at least October 2018 (see Licci v Lebanese Can. Bank, SAL, 20 N.Y.3d 327, 339 [2012] [foreign defendant's "repeated use" of New York bank accounts to effect wire transfers on behalf of foreign client sufficient to exercise long-arm jurisdiction]), and retained New York professional firms to review tether cash reserves and to make public statements on respondents' behalf about the Bitfinex platform and tether cash reserves in 2017 and 2018 (see Courtroom Tel. Network v Focus Media, 264 A.D.2d 351, 353 [1st Dept 1999] [long-arm jurisdiction established where the defendant relied on agents "to perform commercial activities in New York for (their) benefit"]).

Accordingly, petitioner has demonstrated that respondents' activities in New York were sufficiently related to the subjects of petitioner's investigation to satisfy specific personal jurisdiction for the purposes of General Business Law § 354. It bears noting that, in an ordinary case, the party opposing a motion to dismiss based on personal jurisdiction need not establish that there is personal jurisdiction. Rather, she need only make a "sufficient start" in demonstrating, prima facie, the existence of personal jurisdiction, since facts relevant to this determination are frequently in the exclusive control of the opposing party and will only be uncovered during discovery (Peterson v Spartan Indus., 33 N.Y.2d 463, 466-467 [1974]; see also Universal Inv. Advisory SA v Bakrie Telecom Pte., Ltd., 154 A.D.3d 171, 179-180 [1st Dept 2017]). Here, some of the information the ex parte order requires respondents to produce to petitioner is relevant to this issue and may reveal additional bases for the court's exercise of personal jurisdiction over respondents if and when petitioner commences an action against them, including documents concerning Bitfinex users and tether holders residing or doing business in New York. For that reason, courts generally permit discovery to proceed solely on the jurisdictional issue in the first instance following a dismissal motion on that basis and a prima facie showing of the existence of personal jurisdiction.

However, what is at issue here is not the existence of personal jurisdiction for a lawsuit but merely for an investigation, which requires a far lighter showing. Petitioner has made a sufficient showing of personal jurisdiction in the context of this Martin Act investigation for Supreme Court to have issued the ex parte order pursuant to General Business Law § 354. The Martin Act authorizes the Attorney General to investigate securities or commodities fraud (as those terms are defined by the Act) "within or from" New York (General Business Law § 352). Petitioner may properly investigate a foreign entity if she "has reasonable basis for believing that [it] violated a New York statute" (La Belle Creole, 10 NY2d at 198). As the Court of Appeals found in relation to the Attorney General's issuance of a subpoena on a foreign corporation pursuant to her broad investigative powers, her request for an order pursuant to General Business Law § 354 "is not rendered improper because it may produce the evidence required to establish that the petitioner is doing business in New York" (id.).

Finally, respondents argue that Supreme Court lacked personal jurisdiction over them because petitioner improperly served the ex parte order when she delivered a noncertified copy to respondents' counsel by hand, email, and overnight delivery. I disagree for two reasons.

First, this Court's decision in Abrams v Lurie (176 A.D.2d 474 [1st Dept 1991]), relied upon by respondents, is not determinative here. In Lurie, we found that a General Business Law § 354 order must be served in accordance with the CPLR, and held that, where there was no showing that personal service on an individual was "impracticable" (CPLR 308[5]; see also 311[b]), service upon him by mail was improper. In doing so, this Court stated:

There is no indication that the individual respondent in Lurie was aware of the Attorney General's investigation, much less that he had already been cooperating and had agreed to accept service of a subpoena, as is the case here. Where respondent is aware of the investigation and has been cooperating, the General Business Law § 354 order is analogous to a temporary restraining order issued in an "already pending action." Accordingly, service pursuant to CPLR 6313 is appropriate. Unlike CPLR 311(b), CPLR 6313(b) does not require a showing of impracticability, but rather provides: "Unless the court orders otherwise, a temporary restraining order together with the papers upon which it was based, and a notice of hearing for the preliminary injunction, shall be personally served in the same manner as a summons" (emphasis added). Here, the court did order otherwise, and specifically authorized that service "of a copy of the Order, and the papers upon which it was granted, on counsel for Respondents" would be sufficient.

Furthermore, whether a defect in service is jurisdictional or a mere technical irregularity that a court may overlook under CPLR 2001 depends upon whether it "affect[s] the likelihood that the [pleading] will reach [the] defendant and inform him that he is being sued" (Ruffin v Lion Corp., 15 N.Y.3d 578, 583 [2010]). In making this determination, "courts must be guided by the principle of notice to the defendant—notice that must be `reasonably calculated, under all the circumstances, to apprise interested parties of the pendency of the action and afford them an opportunity to present their objections'" (id. at 582, quoting Mullane v Central Hanover Bank & Trust Co., 339 U.S. 306, 314 [1950]). The Court of Appeals noted in Ruffin, in dicta, that mailing, emailing, or delivering the pleading to the wrong person all "would present more than a technical infirmity, even if defendant actually receives the documents, inasmuch as these methods in general introduce greater possibility of failed delivery" (id. at 583). In Ruffin, the Court held that personal service upon the defendant bus company at its out-of-state headquarters by a person not authorized under the CPLR to make such service was a mere technical infirmity, which the motion court properly overlooked in denying the defendant's motion to vacate the default judgment against it.

Here, petitioner's service of a copy, rather than a certified copy as required by General Business Law § 355, is unquestionably a mere technical infirmity, since it had no impact on the likelihood of failed delivery. Moreover, the order on its face required service only of a "copy," not a certified copy. Petitioner's service by hand, email and overnight delivery on respondents' attorney with whom she had been dealing throughout her investigation was reasonably calculated to inform respondents of the existence of the General Business Law § 354 order. As discussed above, the ex parte order in this case is not a summons or complaint informing respondents for the first time of a lawsuit's commencement. Rather, it is simply the next step in petitioner's investigation of respondents, who were well aware of it and were cooperating with it.

Moreover, even if service had been improper, petitioner argues that respondents waived any objection based on lack of personal jurisdiction because of inadequate service by failing to raise it in their initial motion to vacate or modify the ex parte order. I agree. Because a General Business Law § 354 application does not result in a final order from a court after trial or summary judgment, there is nothing to "dismiss." Respondents' only remedy is to seek to vacate or modify the General Business Law § 354 order. Accordingly, respondents' earlier motion to vacate the General Business Law § 354 order was, procedurally speaking, their motion to dismiss. By failing to make their case as to lack of personal jurisdiction based on improper service in that motion, the determination of which respondents have not appealed, respondents have waived this argument.

Accordingly, the order of the Supreme Court, New York County (Joel M. Cohen, J.), entered August 19, 2019, which, insofar as appealed from as limited by the briefs, denied respondents' motion to dismiss, should be affirmed, without costs.

Order, Supreme Court, New York County, entered August 19, 2019, affirmed, without costs.