Exhibit A: Opinion and Order (Katherine Polk Failla, District Judge) — Southern District of New York (Dkt. 429-1, S.D. Fla.)
Summary
Exhibit A (Document 429-1) in Case 1:21-md-02989-CMA, entered October 22, 2021 (128 pages): the Opinion and Order of the U.S. District Court for the Southern District of New York in In re Tether and Bitfinex Crypto Asset Litigation, 19 Civ. 9236 (KPF) (Document 182, filed September 28, 2021), by District Judge Katherine Polk Failla. On a 593-paragraph complaint alleging that the defendants used the crypto-asset tether to inflate cryptocommodity prices, with Sherman Act, Commodities Exchange Act, civil RICO, fraud and New York General Business Law § 349 claims, the court grants in part and denies in part the Rule 12(b)(6) motions to dismiss and denies Reginald Fowler's Rule 12(b)(2) motion. The motions are denied as to Counts One, Two, Four, Five, Seven and Eleven, Count Six is dismissed in part, and answers are due by October 28, 2021.
Summary drafted by a model from the document's text below and checked by script against that text before publication. It is a navigation aid, not a reading of what the document proves. Where AI is used
- Date
- 2021-10-22
Cite this document
“Exhibit A: Opinion and Order (Katherine Polk Failla, District Judge) — Southern District of New York (Dkt. 429-1).”
Original at archive.org, dated 2021-10-22. Archived at Pandemic Darlings, https://pandemicdarlings.com/source-documents/2021-10-22-see-chambers-v-time-warner-inc-282-f-3d-147-152-53-2d-cir-2002/
, SHA-256 bec438934a5914c34bac06b79a2b262fbcc7b48f98b0d709af802692ff56c75b.Full text
Case 1:21-md-02989-CMA Document 429-1 Entered on FLSD Docket 10/22/2021 Page 1 of
128
Exhibit A
Case 1:21-md-02989-CMA
Case 1:19-cv-09236-KPF
Document 429-1
Document 182
Entered on
FiledFLSD
09/28/21
Docket
Page 1
10/22/2021
of 127 Page 2 of
128
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
In re: 19 Civ. 9236 (KPF)
TETHER AND BITFINEX CRYPTO ASSET OPINION AND ORDER
LITIGATION
KATHERINE POLK FAILLA, District Judge:
In a 593-paragraph complaint, a group of individual investors who
purchased cryptocommodities — a class of crypto-assets that includes
bitcoin — detailed a wide-ranging conspiracy to artificially inflate the price of
those cryptocommodities. The thrust of Plaintiffs’ allegations is that iFinex
Inc., BFXNA Inc., BFXWW Inc., Tether Holdings Limited, Tether Operations
Limited, Tether Limited, Tether International Limited, DigFinex Inc., Giancarlo
Devasini, Ludovicus Jan van der Velde, Philip G. Potter, Reginald Fowler,
Crypto Capital Corp., Bittrex, Inc., and Poloniex, LLC (collectively,
“Defendants”) 1 engaged in a scheme to make large, carefully-timed purchases
of cryptocommodities using a fraudulently issued crypto-asset — called “tether”
or “USDT” — in an effort to signal to the market that there was enormous,
organic demand for cryptocommodities, thus causing the price of those
1 For convenience, the Court refers to Defendants as follows: iFinex Inc., BFXNA Inc., and
BFXWW Inc. are collectively referred to as “Bitfinex” or the “Bitfinex Defendants”; Tether
Holdings Limited, Tether Limited, Tether Operations Limited, and Tether International
Limited are collectively referred to as “Tether” or the “Tether Defendants”; Giancarlo
Devasini, Ludovicus Jan van der Velde, and Philip G. Potter are collectively referred to
as the “Individual Defendants”; DigFinex, the Bitfinex Defendants, the Tether
Defendants, Velde, and Devasini are collectively referred to as the “B/T Defendants”;
the B/T Defendants and Potter are collectively referred to as the “DigFinex Defendants”;
Bittrex, Inc. and Poloniex, LLC are collectively referred to as the “Exchange
Defendants”; and Crypto Capital Corp. and Reginald Fowler are collectively referred to
as the “CC Defendants.”
Case 1:21-md-02989-CMA
Case 1:19-cv-09236-KPF
Document 429-1
Document 182
Entered on
FiledFLSD
09/28/21
Docket
Page 2
10/22/2021
of 127 Page 3 of
128
commodities to spike, and thereby creating and sustaining a “bubble” in the
cryptocommodity market.
Plaintiffs initiated this putative class action in October 2019, and bring
claims against Defendants under: (i) the Sherman Act, 15 U.S.C. §§ 1-38;
(ii) the Commodities Exchange Act (“CEA”), 7 U.S.C. §§ 1-27; (iii) the civil
provisions of the Racketeer Influenced and Corrupt Organizations Act (“RICO”),
18 U.S.C. §§ 1961-1968; (iv) the common law tort of fraud; and (v) New York
General Business Law (“GBL”) § 349, for misconduct that is alleged to have
occurred from February 17, 2015, to the present (the “Class Period”).
The B/T Defendants, the Exchange Defendants, Potter, and Fowler
(collectively, the “Moving Defendants”) have moved to dismiss the Amended
Consolidated Class Action Complaint (the “Amended Complaint” or “CAC”)
under Federal Rule of Civil Procedure 12(b)(6), and Fowler further moves to
dismiss for lack of personal jurisdiction pursuant to Rule 12(b)(2). As set forth
in the remainder of this Opinion, the Court grants in part and denies in part
the Moving Defendants’ motions to dismiss.
BACKGROUND 2
A. Factual Background
1. The Parties
The Tether Defendants are the central authority over and issuer of
USDT — a “stablecoin,” so called because it is purportedly pegged to and
2 This Opinion draws its facts from Plaintiffs’ Amended Consolidated Class Action
Complaint (the “Amended Complaint” or “CAC” (Dkt. #114)), the well-pleaded
allegations of which are taken as true for purposes of the instant motions. Additionally,
2
Case 1:21-md-02989-CMA
Case 1:19-cv-09236-KPF
Document 429-1
Document 182
Entered on
FiledFLSD
09/28/21
Docket
Page 3
10/22/2021
of 127 Page 4 of
128
backed by U.S. dollars held in reserve by Tether. (CAC ¶¶ 5, 29, 112-119). 3
Plaintiffs allege that Tether “represented to the market that every USDT in
circulation was backed by a U.S. dollar in Tether’s bank account, and holders
could exchange their USDT for those dollars anytime they wished. USDT was
thus held out as the digital equivalent of U.S. dollars.” (Id. at ¶ 5; see also id.
at ¶¶ 116-117). Plaintiffs further allege that USDT is the most widely used
crypto-asset in the world by trading volume, and the third-largest crypto-asset
in the world by market capitalization, the latter of which Plaintiffs estimate at
$9.1 billion, based on the more than 9.1 billion USDT in circulation. (Id. at
¶¶ 135, 137). In 2019, Bitfinex and Tether represented that USDT possessed a
near-perfect monopoly on the stablecoin market by accounting for 98.7% of
worldwide stablecoin trading volumes; and Plaintiffs allege that for much of the
a court may consider any written instrument attached to the complaint as an exhibit,
any statements or documents incorporated by reference in the complaint, and
documents that are “integral” to the complaint even if they are not incorporated by
reference. See Chambers v. Time Warner, Inc., 282 F.3d 147, 152-53 (2d Cir. 2002); see
generally Goel v. Bunge, Ltd., 820 F.3d 554, 559 (2d Cir. 2016).
For ease of reference, the Court refers to the B/T Defendants’ memorandum in support
of their joint motion to dismiss as “B/T Br.” (Dkt. #143); to the Exchange Defendants’
memorandum in support of their joint motion to dismiss as “Exchange Br.” (Dkt. #147);
to Philip G. Potter’s memorandum in support of his motion to dismiss as “Potter Br.”
(Dkt. #145); to Reginald Fowler’s memorandum in support of his motion to dismiss as
“Fowler Br.” (Dkt. #149); to Plaintiffs’ omnibus memorandum in opposition to the
motions to dismiss as “Pl. Opp.” (Dkt. #154); to the B/T Defendants’ joint reply as “B/T
Reply” (Dkt. #164); to the Exchange Defendants’ joint reply as “Exchange Reply” (Dkt.
#166); to Philip G. Potter’s reply as “Potter Reply” (Dkt. #165); and to Reginald Fowler’s
reply as “Fowler Reply” (Dkt. #171).
3 Tether Holdings Limited is the holding company of Defendants Tether Limited, Tether
Operations Limited, and Tether International Limited, and it is incorporated in and a
citizen of the British Virgin Islands. (CAC ¶ 30). Plaintiffs allege that Tether Operations
Limited appears to be incorporated in and a citizen of the British Virgin Islands. (Id. at
¶ 31). Tether International Limited is incorporated in and a citizen of the British Virgin
Islands. (Id. at ¶ 32). Tether Limited is incorporated in and a citizen of Hong Kong. (Id.
at ¶ 33).
3
Case 1:21-md-02989-CMA
Case 1:19-cv-09236-KPF
Document 429-1
Document 182
Entered on
FiledFLSD
09/28/21
Docket
Page 4
10/22/2021
of 127 Page 5 of
128
relevant time period, Tether had a nearly 100% market share in stablecoin. (Id.
at ¶¶ 135-136).
The Bitfinex Defendants operate an online platform called “Bitfinex” for
exchanging and trading crypto-assets. (CAC ¶ 25). 4 Bitfinex is one of the
“largest and least regulated” crypto-exchanges in the world, and it allows users
to deposit and withdraw “fiat” currency, such as U.S. dollars or euros, in
addition to facilitating crypto-to-crypto transactions. (Id. at ¶ 139).
DigFinex Inc. (“DigFinex”) operates as the ultimate parent company of
the Bitfinex Defendants and the Tether Defendants. (CAC ¶ 23). Plaintiffs
allege that, due in part to DigFinex’s common ownership and control of Bitfinex
and Tether, Bitfinex and Tether are “essentially the same,” a fact that the
DigFinex Defendants purportedly concealed. (Id. at ¶¶ 7, 152-161). DigFinex
is incorporated in and a citizen of the British Virgin Islands, and the Individual
Defendants are among DigFinex’s shareholders. (Id. at ¶¶ 23-24).
Ludovicus Jan van der Velde (“Velde”) is a citizen of the Netherlands and
is the Chief Executive Officer (“CEO”) of iFinex Inc., BFXNA Inc., BFXWW Inc.,
and Tether Limited, positions he has held since early 2013. (CAC ¶ 34). Velde
is one of two directors listed on the corporate registries of DigFinex, iFinex Inc.,
and Tether Limited; is a shareholder of DigFinex and Tether Holdings Limited;
4 iFinex Inc. is incorporated in and is a citizen of the British Virgin Islands. iFinex Inc.
owns and operates the online crypto-exchange called “Bitfinex,” and is the holding
company that wholly owns Defendants BFXNA Inc. and BFXWW Inc. (CAC ¶ 26).
BFXNA Inc. and BFXWW Inc. are incorporated in and are citizens of the British Virgin
Islands. (Id. at ¶¶ 27-28).
4
Case 1:21-md-02989-CMA
Case 1:19-cv-09236-KPF
Document 429-1
Document 182
Entered on
FiledFLSD
09/28/21
Docket
Page 5
10/22/2021
of 127 Page 6 of
128
and is the former CEO of Perpetual Action Group (Asia), a shareholder of
DigFinex. (Id.).
Giancarlo Devasini is a citizen of Italy and the Chief Financial Officer
(“CFO”) of Bitfinex and Tether. (CAC ¶ 35). Along with Velde, he is the other
director identified on the corporate registries of DigFinex, iFinex Inc., and
Tether Limited; and he is also a shareholder of Tether Holdings Limited and
DigFinex. (Id.). Plaintiffs allege that Devasini was involved in creating Bitfinex.
(Id.).
Philip G. Potter is a citizen of New York and a co-founder of Tether. (CAC
¶¶ 36, 122). He was the Chief Strategy Officer (“CSO”) of Bitfinex and Tether
from in or around 2013 until “around the end of February 2018.” (Potter Br. 3;
see also CAC ¶ 36). Plaintiffs allege that Potter was or is a director of Tether
Holdings Limited and a shareholder of DigFinex. (CAC ¶ 36).
Bittrex and Poloniex operate online platforms for exchanging and trading
crypto-assets. (CAC ¶ 37). 5 Each was founded in 2014. (Id. at ¶¶ 162, 170).
As relevant here, both exchanges were, for much of the relevant period, so-
called “crypto-to-crypto exchanges,” allowing their customers to trade only
different crypto-assets for each other and refusing to offer fiat-based deposits
or exchanges. (Id. at ¶¶ 164-165, 172). Both exchanges are registered as
money services businesses with the Department of the Treasury’s Financial
5 Bittrex is incorporated in and a citizen of Delaware, with a principal place of business is
in Washington. (CAC ¶ 38). Poloniex is incorporated in and a citizen of Delaware, with
a principal place of business in Massachusetts. (Id. at ¶ 39).
5
Case 1:21-md-02989-CMA
Case 1:19-cv-09236-KPF
Document 429-1
Document 182
Entered on
FiledFLSD
09/28/21
Docket
Page 6
10/22/2021
of 127 Page 7 of
128
Crime Enforcement Network, and both entities purport to comply with Know-
Your-Customer and anti-money-laundering regulations. (Id. at ¶¶ 169, 179).
Crypto Capital Corp. (“Crypto Capital”) is incorporated in and a citizen of
Panama. (CAC ¶ 40). It operated as a “payment processor” that marketed
itself to crypto-asset exchanges. (Id.). Reginald Fowler, a citizen of Arizona,
acted as an employee, agent, or partner of Crypto Capital, and was responsible
for, inter alia, creating shell companies and opening bank accounts that could
be used by Bitfinex and Tether to process U.S. dollar and other fiat currency
transactions. (Id. at ¶¶ 41, 182). Plaintiffs allege that Bitfinex and Tether first
partnered with Crypto Capital in 2014 and had become completely dependent
on it for day-to-day business operations by 2017 — as “conventional banks
began shutting down Tether and Bitfinex accounts” — to the point that, by
early 2018, the CC Defendants controlled more than $1 billion of Bitfinex
funds. (Id. at ¶¶ 180, 183-184). 6
Plaintiffs Matthew Script, Jason Leibowitz, Benjamin Leibowitz, Aaron
Leibowitz, and Pinchas Goldshtein are purchasers of various
cryptocommodities. (See CAC ¶¶ 18-22). Plaintiffs allege that during the Class
Period, they each purchased cryptocommodities at prices that had been
artificially inflated by Defendants’ market manipulation, causing Plaintiffs to
suffer economic losses and actual damages. (Id.). Plaintiffs provide examples
of specific cryptocommodity purchases made during the class period. (Id.).
6 To date, Crypto Capital Corp. has not appeared or otherwise participated in this
litigation.
6
Case 1:21-md-02989-CMA
Case 1:19-cv-09236-KPF
Document 429-1
Document 182
Entered on
FiledFLSD
09/28/21
Docket
Page 7
10/22/2021
of 127 Page 8 of
128
Only one of the named plaintiffs, Goldshtein, is alleged to have purchased
cryptocommodities futures. (Id. at ¶ 22). In particular, Goldshtein is alleged to
have purchased bitcoin futures between January 16, 2018, and June 3, 2020
(shortly before the filing of the Amended Complaint). (Id.).
2. Crypto-assets and the Cryptocommodity Market
a. Types of Crypto-assets
As noted, this case involves the purportedly fraudulent creation of
crypto-assets for the purpose of manipulating the market for
cryptocommodities. Crypto-assets are “digital assets that use a variety of
cryptographic principles to secure transactions, control the creation of
additional units, and verify their transfer.” (CAC ¶ 47). 7 As of the time
Plaintiffs initiated this lawsuit, there were more than 2,000 different crypto-
assets available. (Id. at ¶ 58). Of relevance to the instant suit are two types of
crypto-assets: cryptocommodities and stablecoins. Plaintiffs allege that the
DigFinex Defendants’ dominance in the stablecoin market allowed them to
directly manipulate prices in the cryptocommodity market (see id. at ¶ 394),
and for this reason, the Court considers their allegations regarding each
crypto-asset and its functions in the crypto-economy.
Plaintiffs contend that cryptocommodities are distinguished from other
crypto-assets by three defining features. (CAC ¶ 64). Cryptocommodities
7 “Cryptocurrency” is a commonly used term to refer to crypto-assets (CAC ¶ 47 n.37);
however, for the purpose of resolving the instant motions, the Court adopts Plaintiffs’
nomenclature for specific elements of the cryptocommodity market, including using the
term “crypto-assets” in lieu of the term “cryptocurrencies.”
7
Case 1:21-md-02989-CMA
Case 1:19-cv-09236-KPF
Document 429-1
Document 182
Entered on
FiledFLSD
09/28/21
Docket
Page 8
10/22/2021
of 127 Page 9 of
128
(i) provide a secure medium of exchange for general purposes, (ii) have a
controlled supply that cannot be unilaterally increased, and (iii) are
decentralized. (Id.). 8 One of the first and most widely known
cryptocommodities is Bitcoin. (Id. at ¶ 48). 9
According to Plaintiffs, the first distinguishing feature of a
cryptocommodity is that it provides a secure medium of exchange. Plaintiffs
explain that the blockchain — a “digital ledger system” that “tracks the
ownership and transfer of every bitcoin in existence” — is what allows
cryptocommodities to provide a secure medium of exchange; the blockchain
was a unique development for digital assets, which typically are easy to
duplicate. (CAC ¶¶ 49-50). For example, the Bitcoin blockchain effectively
prevents the duplication or counterfeiting of bitcoin because it: (i) provides a
full transaction history of each bitcoin, (ii) publicly lists every address and the
number of bitcoin associated with that address, and (iii) allows anyone to see
every bitcoin transaction in which that address has engaged. (Id. at ¶¶ 50-51).
The second distinguishing feature of a cryptocommodity is that it has a
controlled supply. For example, Bitcoin maintains its blockchain and provides
for new bitcoin to enter the economy through a consensus mechanism known
8 Examples of cryptocommodities Plaintiffs purchased include bitcoin, ethereum,
ethereum classic, litecoin, monero, dash, and ZCash. (CAC ¶ 66; see also id. at ¶¶ 18-
22).
9 The term “bitcoin” can refer to a computer protocol or a unit of exchange. The Court
adopts Plaintiffs’ practice and uses the term “Bitcoin” when referring to the protocol,
software, and community, and the term “bitcoin” when referring to the units of
exchange. (CAC ¶ 48 n.38). Similarly, “ether” refers to one unit of exchange in the
“Ethereum” system. (Id. at ¶ 67 n.41).
8
Case 1:21-md-02989-CMA
Case 1:19-cv-09236-KPF
Document 429-1
DocumentEntered
182 onFiled
FLSD
09/28/21
DocketPage 9
10/22/2021
of 127 Page 10 of
128
as “mining,” which process entails the use of computer programs to perform
“complex, resource-intensive automated verifications of past transactions,
which are then added to the blockchain.” (CAC ¶ 52). Bitcoin “miners” are
rewarded with new bitcoin. (Id.). Bitcoin is designed to become progressively
more difficult to mine as more bitcoin is mined, creating scarcity and ensuring
a predictable supply of bitcoin, thus “preventing a flood of new bitcoin that
could undercut the value of the preexisting bitcoin.” (Id. at ¶¶ 53-54).
Finally, cryptocommodities are decentralized, meaning that there is no
central authority or entity that administers or manages any cryptocommodity.
(CAC ¶ 56). As Plaintiffs explain, decentralization impacts value because:
[i]f Bitcoin were run on centralized servers, the
underlying value of bitcoin would rely on the trust that
individuals had in those operating the centralized
servers. If Bitcoin’s creator could issue more bitcoin at
a whim, the value of bitcoin would reflect that
uncertainty. But because Bitcoin’s cryptographic
protocols are self-sustaining and cannot be affected by
the originator, the success of Bitcoin does not hinge on
any single entity.
(Id.). As such, the values of cryptocommodities are not tied to the authority or
entity issuing the asset, distinguishing it from corporate stocks and bonds or
fiat currency, all of which are tied to the value of the issuing company or the
creditworthiness or political stability of the issuing government. (Id. at ¶¶ 56-
57).
Not all crypto-assets fit Plaintiffs’ definition of a cryptocommodity. For
example, some crypto-assets are distributed through issuances akin to those of
traditional corporate securities and do not have a controlled supply. (CAC
9
Case 1:21-md-02989-CMA
Case 1:19-cv-09236-KPF
Document 429-1
Document 182
Entered on
FiledFLSD
09/28/21
Docket
Page 10
10/22/2021
of 127Page 11 of
128
¶ 61). Others are not decentralized or meant to be used as a secure medium of
exchange. (Id. at ¶¶ 60, 62). As relevant here, one example of a crypto-asset
that is not a cryptocommodity is stablecoin. (Id. at ¶¶ 112, 114). Stablecoins
are designed to maintain a consistent value relative to non-digital assets like
gold or fiat currency, and for this reason they are neither decentralized nor
mined. (Id. at ¶¶ 113-115). Generally, an issuer unilaterally controls the
creation of new stablecoins. (Id. at ¶ 114). As such, for a stablecoin to have
value, its issuer must guarantee that it will keep the coin “stable,” for example,
by issuing new coins only in a manner linked to the asset it is intended to
mirror. (Id. at ¶ 115). If not, the coin “would be subject to potentially
unlimited inflation as more was created.” (Id. at ¶ 114). Generally, the issuer
promises to issue coins fully backed by the corresponding asset. (Id. at ¶ 113).
b. The Storage and Transfer of Crypto-assets
Crypto-assets are typically stored on cryptographic “keys.” (CAC ¶ 99).
Thus, control of crypto-assets is primarily attested through the control of the
key where those assets are stored. (Id.). Cryptographic keys generally have
two components: a public key and a private key. (Id.). To use Bitcoin as an
example, the public key is used to produce the “bitcoin address” — a
destination for transfers of bitcoin, like the account number of a conventional
bank account. (Id. at ¶ 100). 10 The private key, by contrast, allows the owner
10 Bitcoin addresses are long strings of alphanumeric text, often abbreviated by a small
group of numbers and letters appearing in the string, such as “1s5F” or “R3w9.” (CAC
¶ 100).
10
Case 1:21-md-02989-CMA
Case 1:19-cv-09236-KPF
Document 429-1
Document 182
Entered on
FiledFLSD
09/28/21
Docket
Page 11
10/22/2021
of 127Page 12 of
128
of bitcoin to access the bitcoin stored on a key, or to authorize the transfer of
crypto-assets from a key to the bitcoin address of another user. (Id. at ¶¶ 101-
102). As noted above, the blockchain means that the transfer of bitcoin (or any
cryptocommodity) is public. In practice, this means that anyone can see the
transferor’s bitcoin address, the recipient’s bitcoin address, and the quantity of
assets transferred; however, the names of the individuals or entities that
control these addresses are private. (Id. at ¶ 103). This system of transfer and
exchange is generally the same for most crypto-assets, including for bitcoin
and USDT. (Id. at ¶ 99).
Crypto-exchanges emerged to enable smoother and faster trading of
crypto-assets. (CAC ¶ 105). To use an exchange to trade crypto-assets,
including cryptocommodities, a user must first create an account on that
exchange. (Id. at ¶ 106). The exchange then provides the user with a deposit
address controlled by the exchange; this exchange-generated and -controlled
deposit address is distinct from a user’s cryptographic key. (Id.). When the
user deposits crypto-assets into that deposit address from the user’s
cryptographic key, the exchange will credit her trading account with the
corresponding crypto-assets. (Id.). The exchange will typically then transfer
the crypto-assets into one of its own cryptographic keys for storage. (Id.).
Similarly, when a user withdraws crypto-assets from an exchange, the
exchange debits the user’s account and transfers a corresponding amount of
crypto-asset from the exchange’s reserve to the address specified by the user.
11
Case 1:21-md-02989-CMA
Case 1:19-cv-09236-KPF
Document 429-1
Document 182
Entered on
FiledFLSD
09/28/21
Docket
Page 12
10/22/2021
of 127Page 13 of
128
(Id. at ¶ 109). 11 As such, transfers within a single crypto-exchange are not
visible in the same way that trades between cryptographic keys are visible
because these transfers do not actually transfer crypto-assets and are thus not
recorded on the blockchain. (Id. at ¶ 110). 12 Plaintiffs allege that “[w]hen a
customer with an existing account wishes to transfer more crypto-assets into
an exchange,” the customer “must ask the exchange for a deposit address[,]
[which] destination address is often different each time the customer makes a
transfer, meaning that one cannot easily trace transactions belonging to a
particular individual. (Id. at ¶ 107). 13
c. The Cryptocommodity Market
Cryptocommodities make up a distinct market — which has grown
exponentially since its establishment — and had a total market capitalization
of over $176 billion in June 2020. (CAC ¶ 64). Due to the digital nature of
cryptocommodities, the geographic market is global. (Id. at ¶ 78). For
11 As Plaintiffs explain, this process is similar to the process used by a customer
transferring funds to an online account with a stockbroker, in that the customer wires
funds from her personal bank account to an account controlled by the broker, for which
she has a personal identification number (or “PIN”) and password. The broker then
credits her with an equivalent amount of funds on its trading platform and places the
funds it received into its reserve. (See CAC ¶ 108).
12 Plaintiffs provide an illustrative example in the Amended Complaint: if a user transfers
bitcoin from her “1s5F” address, which is not on an exchange, to an address controlled
by an exchange, the blockchain will record a transfer from the 1s5F address to an
address designated by the exchange and from there to an address that the exchange
uses to store consumer bitcoin. But trades the user makes within the exchange will not
be recorded on the blockchain. Instead, intra-exchange transactions will be logged only
on the account balance sheets for customers trading on the platform. Such intra-
exchange activity is visible to the exchange itself, and may be publicized by the
exchange, but it is not public. (See CAC ¶ 110).
13 The Exchange Defendants dispute that they prohibit their customers from reusing
deposit addresses. (See Exchange Br. 5-6).
12
Case 1:21-md-02989-CMA
Case 1:19-cv-09236-KPF
Document 429-1
Document 182
Entered on
FiledFLSD
09/28/21
Docket
Page 13
10/22/2021
of 127Page 14 of
128
example, crypto-exchanges are located all over the world and often allow
customers from any country to access and use them. (Id.). 14 Plaintiffs allege
that there are “meaningful barriers to entry into the cryptocommodity market,”
including (i) the need to create a sufficiently large community of independent
“miners” and other users to “create a distributed peer-to-peer network to verify
transactions on their own blockchains”; and (ii) the need for cryptocommodities
to be traded on exchanges, a process that entails significant technical
challenges. (Id. at ¶ 71). This latter barrier must be overcome “before any
cryptocommodity can become a widely accepted means of exchange with a
long-term, independent store of value.” (Id.).
Plaintiffs allege that the cryptocommodity market includes “both the
cryptocommodities themselves ... and their corresponding futures contracts.”
(CAC ¶ 72). They further allege that futures and spot transactions for the same
commodity are “inherently part of the same product market because they
involve the same commodity. While a commodity’s prices may be lower or
higher in futures transactions than in spot transactions, those prices will
necessarily converge as the delivery date for the futures converges to the
present.” (Id. at ¶ 74).
14 According to Plaintiffs, the demand for cryptocommodities is attributable to their ability
to satisfy three needs that are intertwined with the global nature of the market. (CAC
¶ 65). Specifically, cryptocommodities (i) “are suitable for satisfying the demand for
products that allow for quick and secure transactions” — “especially those conducted
on international digital platforms”; (ii) “can serve as long-term stores of value not
controlled by a government or a private entity”; and (iii) “are efficient for both large and
small transaction volumes.” (Id. at ¶¶ 65, 67). As a result, other crypto-assets or non-
digital assets are not substitutes for cryptocommodities. (Id. at ¶¶ 68-70).
13
Case 1:21-md-02989-CMA
Case 1:19-cv-09236-KPF
Document 429-1
Document 182
Entered on
FiledFLSD
09/28/21
Docket
Page 14
10/22/2021
of 127Page 15 of
128
The Amended Complaint illustrates the relationship between spot and
futures transactions in the cryptocommodity market using bitcoin and bitcoin
futures as an example. 15 Plaintiffs include a chart of bitcoin and bitcoin
futures prices on the Chicago Mercantile Exchange (“CME”) from December
2017 until February 2020, demonstrating that the prices of bitcoin and bitcoin
futures “move[d] in step.” (CAC ¶¶ 75-76). Plaintiffs further allege that
regulatory filings “confirm the connection between the ‘spot’ price and futures
prices,” citing information provided to the Commodity Futures Trading
Commission (“CFTC”) by the CME, which information Plaintiffs contend
establishes that “CME designed bitcoin futures to track the spot price as
closely as possible.” (Id. at ¶ 77). Plaintiffs allege that the bitcoin futures that
traded on the Chicago Board Options Exchange (“CBOE”) were similarly
engineered. (Id.). From this information, Plaintiffs posit that “[a]ny price
manipulation or interference with price discovery in the ‘spot’ market
accordingly has direct and immediate effects on bitcoin futures prices.” (Id. at
¶ 75).
Plaintiffs also allege that the cryptocommodity market has historically
been vulnerable to price manipulation because it is volatile and lightly
regulated, as compared to other commodity markets. (CAC ¶ 79). From 2014
to 2019, the average daily volatility of bitcoin, ethereum, and litecoin was seven
15 Bitcoin futures have traded on the Chicago Mercantile Exchange (“CME”) and Chicago
Board Options Exchange (“CBOE”) since December 2017, though bitcoin futures
stopped trading on the Chicago Board Options Exchange (“CBOE”) in June 2019. (CAC
¶ 73).
14
Case 1:21-md-02989-CMA
Case 1:19-cv-09236-KPF
Document 429-1
Document 182
Entered on
FiledFLSD
09/28/21
Docket
Page 15
10/22/2021
of 127Page 16 of
128
times greater than that of the Bloomberg commodity index; three times greater
than that of the Bloomberg energy index; and six times greater than that of the
Bloomberg precious metal index. (Id. at ¶ 80). Plaintiffs attribute this volatility
to several factors, including the lack of: (i) a long trading history; (ii) easily
reportable figures understood to correlate with growth; and (iii) significant price
anchors that come with large-scale institutional capital investments. (Id. at
¶ 81). Additionally, although the CFTC categorized bitcoin as a commodity in
2015, the cryptocommodity market has been subject to limited regulation. (Id.
at ¶ 82).
d. The Cryptocommodity Market During the Class Period
The price of bitcoin and most cryptocommodities increased significantly
from the beginning of the class period until early 2018, when the market
crashed. (CAC ¶¶ 93-94). For example, Plaintiffs allege that from 2014 to
2016, the price of bitcoin fluctuated between $200 and $800, but that starting
in late 2016 the price began spiking; that by March 2017 the price of bitcoin
was $1,200; and that by July 2017 it had risen above $2,000. (Id. at ¶ 93).
Between July 2017 and December 2017, the price of bitcoin increased tenfold,
and on December 17, 2017, the price of bitcoin peaked — at an astounding
$20,000 per unit. (Id. at ¶ 94). At that time, bitcoin’s market capitalization
was nearly $327 billion. (Id.).
Shortly thereafter, however, the market began to crash, and the price of
bitcoin fell to $6,200 by February 2018. (CAC ¶ 96). By December 2018, the
price of bitcoin was $3,500 and its market capitalization was $62 billion. (Id.).
15
Case 1:21-md-02989-CMA
Case 1:19-cv-09236-KPF
Document 429-1
Document 182
Entered on
FiledFLSD
09/28/21
Docket
Page 16
10/22/2021
of 127Page 17 of
128
Similarly, the combined market capitalization of all virtual currencies, not just
bitcoin, was roughly $795 billion on January 6, 2018, and by February 6,
2018, had dropped more than 50% to $329 billion. (Id. at ¶ 98).
3. Plaintiffs’ Allegations of Misconduct
The crux of Plaintiffs’ Amended Complaint is that the DigFinex
Defendants, who controlled Tether and Bitfinex (CAC ¶¶ 152-161), fraudulently
issued between $1 and $3 billion worth of the crypto-asset USDT, which asset
Defendants claimed was backed at all times by an equivalent amount of U.S.
dollar reserves, but was in fact completely unbacked and “print[ed] out of thin
air.” (Pl. Opp. 1; see also CAC ¶¶ 185-189, 193-194, 216-218). Plaintiffs allege
that the unbacked USDT was transferred from Tether to Bitfinex, and then
further transferred to accounts maintained by Bitfinex on two crypto-
exchanges operated by the Exchange Defendants, Poloniex and Bittrex. (CAC
¶¶ 195-218, 261-263). Once the unbacked USDT was transferred to Poloniex
and Bittrex, Defendants used it to make carefully timed purchases of
cryptocommodities when prices threatened to fall, thereby fraudulently giving
the appearance of price “floors” in the market, artificially simulating organic
demand, and creating a “colossal bubble” in the cryptocommodity market. (Id.
at ¶¶ 264-309). Plaintiffs allege that the CC Defendants assisted in covering
up that USDT was unbacked (id. at ¶¶ 342-366), and that the Exchange
Defendants were knowing and willing participants in the scheme, despite
ostensibly competing with Bitfinex (id. at ¶¶ 310-341). Given the extensive
factual allegations contained in Plaintiffs’ 150-plus-page Amended Complaint,
16
Case 1:21-md-02989-CMA
Case 1:19-cv-09236-KPF
Document 429-1
Document 182
Entered on
FiledFLSD
09/28/21
Docket
Page 17
10/22/2021
of 127Page 18 of
128
the Court relays only those facts regarding Defendants’ scheme that are
relevant to resolving the instant motions.
a. Defendants Issued USDT Unbacked by U.S. Dollars
As noted, Plaintiffs’ allegations stem from the fraudulent issuance of
USDT, a stablecoin that is issued and administered by the Tether Defendants.
(CAC ¶ 29). Plaintiffs allege that from Tether’s founding in 2014 through the
present, in order to maintain the value of USDT, Tether and other of the
DigFinex Defendants (including Bitfinex), repeatedly and publicly represented
that: (i) each USDT would be backed by one U.S. dollar held in Tether’s
reserves; (ii) Tether would issue new USDT only in response to legitimate
market demand — i.e., “customers willing to exchange dollars one-for-one for
USDT”; and (iii) customers could exchange USDT for U.S. dollars at any time (a
process called “burning” USDT). (Id. at ¶¶ 116-117, 119-134, 147-151
(examples of the DigFinex Defendants’ public representations)). In fact,
according to Plaintiffs, “USDT was not fully backed by U.S. dollars,” and Tether
“issued unbacked USDT for its own purposes without regard to real demand.”
(Pl. Opp. 5). The Amended Complaint provides extensive detail about how the
DigFinex Defendants issued unbacked USDT and relies on expert analysis to
support their allegations. The Court summarizes the allegations briefly below.
17
Case 1:21-md-02989-CMA
Case 1:19-cv-09236-KPF
Document 429-1
Document 182
Entered on
FiledFLSD
09/28/21
Docket
Page 18
10/22/2021
of 127Page 19 of
128
Tether’s “Treasury” is the account — solely controlled by Tether — from
and in which all USDT is issued and burned. (CAC ¶ 158). 16 Although
customers could purchase USDT directly from Tether for most of the Class
Period, the “vast majority” of USDT issued by Tether was issued to accounts on
Bitfinex, and direct purchases from Tether “made up a tiny fraction of all
issued USDT.” (Id. at ¶¶ 159-160). Critically, Bitfinex “was the only exchange
to which Tether directly transferred USDT,” and due to the exclusive
relationship between Tether and Bitfinex, Bitfinex was the only medium
through which USDT could enter the “crypto-economy.” (Id. at ¶¶ 160-161).
Plaintiffs allege that this exclusive power over the distribution of USDT gave
Bitfinex “substantial economic power in the crypto-markets” (id.), as Tether
had a nearly 100% market share in stablecoin during the relevant period (id. at
¶ 136; see also id. at ¶ 135).
However, Plaintiffs allege that Bitfinex and Tether were secretly under
common control, which facilitated Defendants’ scheme to fraudulently issue
unbacked USDT. (See CAC ¶¶ 152-161). For example, Devasini and
Potter (Bitfinex’s CFO and CSO, respectively) created and controlled Tether’s
holding company (id. at ¶ 153), and Devasini and Velde (Bitfinex’s CEO) were
the only directors of Tether Limited (id. at ¶ 154). Plaintiffs note that the
DigFinex Defendants omitted these facts from their public statements,
16 USDT issuances and burns are visible to anyone on the blockchain; however, the
corresponding U.S. dollar for USDT exchanges that are supposed to occur in issuances
and burns are not visible to the public. (CAC ¶ 118).
18
Case 1:21-md-02989-CMA
Case 1:19-cv-09236-KPF
Document 429-1
Document 182
Entered on
FiledFLSD
09/28/21
Docket
Page 19
10/22/2021
of 127Page 20 of
128
including websites, press releases, and announcements, thereby creating the
illusion that USDT was supported by two independent entities — one that
issued and burned USDT while maintaining a cash reserve to “back” the
crypto-asset, and one that independently distributed USDT and thus had a
vested interest in monitoring the stablecoin’s legitimacy. (Id. at ¶¶ 152-156).
With Tether and Bitfinex under common control, the DigFinex
Defendants proceeded to issue, from October 2014 through December 2018,
$3 billion in USDT — comprising 72% percent of all USDT issued during that
time — to just two user addresses on the Bitfinex exchange. (CAC ¶¶ 203, 208,
261-262). These two addresses belong to Bitfinex. (Id. at ¶ 204). From these
two addresses, Bitfinex then transferred nearly all of the USDT it received to
two corresponding addresses, one on the Poloniex exchange and the other on
the Bittrex exchange (id. at ¶¶ 205-209), where — and as discussed in greater
detail below — it was purportedly used to make purchases that would
artificially inflate the price of cryptocommodities.
Plaintiffs allege that the majority of the transfers of USDT from the
Tether Treasury to the two Bitfinex accounts were made in “large, round
numbers” and “in amounts and at times highly unlikely to reflect genuine
customer demand.” (CAC ¶¶ 203, 269). Even more suspect, these transfers
were then passed on — in corresponding issuances and sizes — to just two
accounts, one on Poloniex and the other on Bittrex. (Id. at ¶¶ 205-209).
Plaintiffs allege that the Poloniex and Bittrex addresses were also controlled by
Bitfinex. (Id. at ¶¶ 205-206). Specifically, Plaintiffs allege that one Bitfinex
19
Case 1:21-md-02989-CMA
Case 1:19-cv-09236-KPF
Document 429-1
Document 182
Entered on
FiledFLSD
09/28/21
Docket
Page 20
10/22/2021
of 127Page 21 of
128
address (“1KYi”) transferred all USDT it received to a Poloniex address
(“1DUb”), which then credited one account controlled by Bitfinex on Poloniex
(“1AA6”); while the other Bitfinex address (“1Gjg”) transferred all USDT it
received to a Bittrex address (“1Po1”), which then credited one account
controlled by Bitfinex on Bittrex (“1J1d”). (Id. at ¶¶ 204-207).
In sum, and despite Defendants’ public claims that USDT was issued
only in exchange for U.S. dollars in response to legitimate market demand,
Plaintiffs allege that 72% of all USDT issued by Tether through the end of 2018
passed through just four accounts upon issuance, all controlled by Bitfinex
(and the other DigFinex Defendants through common control): two belonging to
Bitfinex on the Bitfinex exchange, and from there to either an account on
Poloniex or to an account on Bittrex, both of which addresses were also
controlled by Bitfinex. (See CAC ¶¶ 280-299 (summarizing independent expert
analysis of unusual trading activity)). As Plaintiffs explain, the unusual
pattern of distribution of USDT demonstrates that “Tether was not just issuing
USDT in response to demand from consumers, which would involve
distributing relatively small amounts to many accounts. Instead it was also,
and in secret, making large issuances to its affiliate, Bitfinex[.]” (Id. at ¶ 218;
see also id. at ¶¶ 204-207). 17
17 As further evidence of this scheme, Plaintiffs allege that the regular flow of USDT
through these four addresses “dramatically changed” following public scrutiny
occasioned by the publication of a report in late January 2018 (the “Tether Report”),
which report concluded that “Tether may not be minted independently of Bitcoin price
and may be created when Bitcoin is falling” to boost bitcoin prices. (CAC ¶ 212). In
response to publication of the Tether Report, Plaintiffs allege that all USDT transfers to
20
Case 1:21-md-02989-CMA
Case 1:19-cv-09236-KPF
Document 429-1
Document 182
Entered on
FiledFLSD
09/28/21
Docket
Page 21
10/22/2021
of 127Page 22 of
128
In essence, Plaintiffs allege that Tether and Bitfinex were issuing USDT to
themselves. Although Tether could have obtained U.S. dollars from Bitfinex in
exchange for every USDT it issued to the two Bitfinex accounts — and thus
could have maintained an adequate reserve of U.S. dollars to back each
outstanding USDT as promised (see CAC ¶¶ 119-134) — the Amended
Complaint alleges that such an explanation is “economically impossible” (id. at
¶ 220). For example, in December 2017, Tether issued 605 million USDT to
Bitfinex, but iFinex — Bitfinex’s parent company — had total revenues of only
$333.5 million for the entirety of 2017. (Id.). This figure suggests that Bitfinex
did not have $605 million to pay Tether for the 605 million in USDT issued to it
in December 2017, and thus Tether did not have adequate cash reserves to
support all of the USDT issued to Bitfinex. (Id.).
Furthermore, Plaintiffs’ examination of Tether’s historical difficulties in
obtaining and retaining access to the U.S. financial system through
correspondent banks is presented as support for their allegation that
Defendants issued unbacked USDT to themselves. (See CAC ¶¶ 219-258). In
order to maintain its one-to-one reserve of U.S. dollars to back outstanding
USDT, Tether would need access to the banking systems required to maintain
such a reserve. (Id. at ¶¶ 222, 236). From October 2014 through March 2017,
Tether issued roughly 42 million USDT. (Id. at ¶ 242). However, in early 2017,
Bitfinex’s and Tether’s banks cut off access to their U.S. correspondent
the 1AA6 and 1J1d addresses ceased for ten days, while USDT transfers from Bitfinex
to other addresses continued as before. (Id. at ¶ 213).
21
Case 1:21-md-02989-CMA
Case 1:19-cv-09236-KPF
Document 429-1
Document 182
Entered on
FiledFLSD
09/28/21
Docket
Page 22
10/22/2021
of 127Page 23 of
128
banking services, and they did not regain access to U.S. correspondent
banking for another six months. (Id. at ¶¶ 233-235, 239). Yet during those six
months, Tether somehow issued 409 million new USDT (id. at ¶ 240) — nearly
ten times the total USDT issued in the previous two-and-a-half-years — and
thus, to maintain USDT’s one-to-one backing, Tether would have needed
access to U.S. correspondent banking to deposit $409 million obtained in
exchange for the issuance of this new USDT. (Id. at ¶ 241; see also id. at
¶¶ 223-227 (describing how correspondent banking works and its importance
to entities like Bitfinex and Tether)). 18 In response to questions about this very
issue, Tether refused to disclose the names of any new banks, and thus
declined to identify the location of its cash reserves. (Id. at ¶ 246).
b. The CC Defendants’ Role in Defendants’ Scheme
Plaintiffs allege that as Tether and Bitfinex lost access to the U.S.
banking system, they became increasingly dependent on the CC Defendants to
“circumvent correspondent bank monitoring and facilitate access to U.S.
18 The Amended Complaint is replete with similar examples. In April 2018, Tether issued
130 million in USDT — and should have added a corresponding $130 million to its cash
reserves — yet that same month Bitfinex was having “extreme difficulty honoring its
clients’ requests to [withdraw] their money from the trading platform.” (CAC ¶¶ 248-
249). Similarly, in October 2018, as Devasini implored Crypto Capital to send Bitfinex
cash to honor client redemption requests, Tether “delisted” 1.04 billion USDT, reducing
the amount of outstanding USDT by nearly 40% and — if Tether’s promises regarding
USDT were accurate — requiring customers to send 1.04 billion in USDT to be
“burned,” and for Tether to send customers $1.04 billion. (Id. at ¶¶ 251, 253).
Plaintiffs allege that an analysis of the blockchain reveals no massive transfer of 1.04
billion USDT in October 2018; instead, the blockchain reveals a net transfer of just 72
million USDT back to Bitfinex. (Id. at ¶¶ 254-255). Nor did Tether and Bitfinex have $1
billion in cash to distribute, as Devasini’s messages to Crypto Capital reveal. (Id. at
¶ 257). Rather, Plaintiffs allege the 1.04 billion in USDT that was delisted could “easily
[be] pull[ed] back from Bitfinex and destroy[ed] without having to pay U.S. dollars in
return” because Tether “had issued that USDT directly to Bitfinex without receiving
U.S. dollars in exchange.” (Id. at ¶ 256).
22
Case 1:21-md-02989-CMA
Case 1:19-cv-09236-KPF
Document 429-1
Document 182
Entered on
FiledFLSD
09/28/21
Docket
Page 23
10/22/2021
of 127Page 24 of
128
banking,” in order to access cash and thus maintain the illusion that USDT
was backed by U.S. dollars. (See CAC ¶ 247; see also id. at ¶¶ 349-363).
Specifically, the CC Defendants provided Bitfinex and Tether access to the U.S.
banking system by creating bank accounts in the name of shell corporations,
which accounts allowed Bitfinex and Tether to access the U.S. banking system
to execute exchanges with customers. (Id. at ¶¶ 349-359). These “shadow
accounts” were closed when banks determined the accounts were being used
by Bitfinex and Tether, driving Crypto Capital and Fowler to create new
accounts in what Potter called a “cat-and-mouse” game. (See id. at ¶¶ 344-
346; see also id. at ¶ 362). Plaintiffs allege that the CC Defendants’ conduct
was “essential to Bitfinex and Tether’s scheme to make manipulative purchases
with debased USDT,” because “[w]ithout the illicit access to the U.S. financial
system facilitated by Fowler and Crypto Capital, Bitfinex and Tether would not
have been able to honor any withdrawal requests, which would have quickly
exposed that USDT was not redeemable or fully backed.” (Id. at ¶ 360).
Critically, according to Plaintiffs, Fowler and Crypto Capital knew that
(i) “Bitfinex and Tether relied on Crypto Capital’s accounts to transact in fiat
currency”; (ii) “these transactions supported the market’s belief that USDT was
fully backed”; and (iii) the illusion of USDT’s full backing “facilitated the
manipulation of cryptocommodity prices.” (CAC ¶ 361). As support, Plaintiffs
point to a series of exchanges on October 15, 2018, between Devasini — CFO of
Tether and Bitfinex, and director and shareholder of DigFinex and iFinex —
and a Crypto Capital employee on the messaging app Telegram, in which
23
Case 1:21-md-02989-CMA
Case 1:19-cv-09236-KPF
Document 429-1
Document 182
Entered on
FiledFLSD
09/28/21
Docket
Page 24
10/22/2021
of 127Page 25 of
128
Devasini pleads with Crypto Capital to “move at least 100M” to the DigFinex
Defendants to honor client redemption requests. (Id. at ¶ 362). Devasini
warns that failure to honor the requests would reveal that USDT was unbacked
and “could be extremely dangerous for everybody [in] the entire crypto
community,” because “BTC [i.e., bitcoin] could tank to below 1k if we don’t act
quickly[.]” (Id.). Plaintiffs allege that the CC Defendants participated in and
benefited from the scheme because (i) they were heavily invested in the
continued success of the crypto-asset market, as their entire business model
depended on its continued existence; (ii) they earned fees and interest on
transactions with the DigFinex Defendants; and (iii) the value of their own
reserves of cryptocommodities were inflated by the scheme, allowing them to
“tak[e] advantage of the bubble they helped create.” (Id. at ¶¶ 364-366).
c. Defendants Used USDT to Manipulate the
Cryptocommodity Market
While the scheme to conceal the unbacked nature of USDT was quite
complex, Defendants’ scheme to use that unbacked USDT to manipulate the
cryptocommodity market was relatively straightforward. In brief, having
convinced the market that each USDT had the value equivalent of one U.S.
dollar, the DigFinex Defendants then “us[ed] the USDT they printed for
themselves to manipulate the cryptocommodity market” by signaling to the
market that the purchases they made with unbacked USDT “reflect[ed] massive
and measurable customer demand for … cryptocommodities. These purchases
thus naturally raised cryptocommodity prices.” (CAC ¶¶ 259, 272).
24
Case 1:21-md-02989-CMA
Case 1:19-cv-09236-KPF
Document 429-1
Document 182
Entered on
FiledFLSD
09/28/21
Docket
Page 25
10/22/2021
of 127Page 26 of
128
As noted above, Plaintiffs allege that from October 2014 through
December 2018, Tether issued 3 billion USDT — 72% of all USDT issued
during that time — to two Bitfinex-owned accounts on the Bitfinex exchange,
from which accounts Bitfinex then transferred the USDT to two Bitfinex-
controlled accounts on Poloniex and Bittrex. (CAC ¶¶ 203-209, 262). After the
USDT sent to Bittrex and Poloniex was credited to Bitfinex’s accounts, Bitfinex
used it to purchase cryptocommodities. (Id. at ¶ 264). Those “illicitly acquired
cryptocommodities” were then sent back to Bitfinex’s exchange address, where
Bitfinex sold them to its customers for U.S. dollars. (Id.). 19 Plaintiffs provide
extensive data to corroborate their allegations. (Id. at ¶¶ 265-269).
Importantly, Plaintiffs contend that Defendants’ fraudulent scheme did
not just involve the conversion of unbacked USDT to valuable assets such as
fiat currency and cryptocommodities; instead, Plaintiffs allege that the entire
scheme was designed to, and had the effect of, artificially inflating the price of
bitcoin and other cryptocommodities. (See CAC ¶¶ 10-12). Because the
market falsely viewed USDT as equivalent to U.S. dollars, large influxes of this
crypto-asset into the cryptocommodity market had an outsized impact; the
market viewed influxes of USDT as a sign of an influx of new cash, and thus
increased demand, into the cryptocommodity market. (See id. at ¶¶ 272, 274).
19 Plaintiffs suggest, but do not directly allege, that the DigFinex Defendants were able to
sell off these illicitly acquired cryptocommodities in secret using so-called “hidden”
orders, in which the “‘hidden’ order does not appear on the publicly visible order book.”
(CAC ¶ 144). Plaintiffs allege that “[t]hese hidden orders present an opaque channel
mechanism for selling off bitcoin without crashing the price.” (Id.).
25
Case 1:21-md-02989-CMA
Case 1:19-cv-09236-KPF
Document 429-1
Document 182
Entered on
FiledFLSD
09/28/21
Docket
Page 26
10/22/2021
of 127Page 27 of
128
Specifically, Plaintiffs allege that the DigFinex Defendants made
carefully-timed, strategic purchases of cryptocommodities using their
unbacked USDT when cryptocommodity prices began to fall, in order to: (i) stop
prices from falling (CAC ¶¶ 276-277); (ii) push the prices of cryptocommodities
back up by causing “price reversions” (id. at ¶¶ 273-276, 278-279); and
(iii) keep prices above certain “round number thresholds” that fostered the
misimpression of “floors” below which cryptocommodity prices would not drop
(see id. at ¶¶ 295-296). In turn, this price manipulation was self-perpetuating,
as it caused the market to falsely believe that: (i) there was increased, organic
demand for cryptocommodities; and (ii) the value of cryptocommodities would
remain stable, and would not pass below certain price thresholds, thus
spurring further investment in cryptocommodities and further inflating prices.
(See id. at ¶ 191).
As an example, Plaintiffs allege that, when cryptocommodity prices had
decreased by 5% or more, the DigFinex Defendants transferred, on average, ten
times more USDT to Poloniex and Bittrex than when prices had gone up. (CAC
¶¶ 276-277). Plaintiffs provide both data visualizations analyzing, and specific
examples of, instances where the DigFinex Defendants sent large influxes of
USDT to their Poloniex and Bittrex accounts, causing cryptocommodity prices
to rise. (See, e.g., id. at ¶¶ 272, 274-275, 278-279). Plaintiffs also cite
extensively to independent, expert analysis purporting to corroborate the
relationship between unbacked USDT, large transfers of USDT from Bitfinex to
Poloniex and Bittrex, and the increase in bitcoin and other cryptocommodity
26
Case 1:21-md-02989-CMA
Case 1:19-cv-09236-KPF
Document 429-1
Document 182
Entered on
FiledFLSD
09/28/21
Docket
Page 27
10/22/2021
of 127Page 28 of
128
prices between March 2017 and March 2018. (See id. at ¶¶ 280-309).
Plaintiffs allege that Defendants’ conspiracy “created the largest asset bubble in
history” — as noted previously, at its height, bitcoin traded at $20,000 in
December 2017, before falling to $3,500 a year later. (See id. at ¶¶ 94, 96-97,
272)
d. The Exchange Defendants’ Role in Defendants’ Scheme
Plaintiffs allege that the DigFinex Defendants needed to utilize other
crypto-exchanges to “flip” their unbacked USDT into more valuable
cryptocommodities, because to have Tether deposit massive amounts of USDT
directly to Bitfinex’s accounts on the Bitfinex exchange, and then immediately
attempt to purchase bitcoin with that newly minted USDT, would raise too
many red flags. In consequence, Bitfinex transferred USDT to one account at
each of Poloniex and Bittrex — direct competitors — and from these accounts
was able to purchase cryptocommodities anonymously and in large quantities,
thereby artificially creating demand for and manipulating the price of
cryptocommodities. (CAC ¶¶ 272, 421).
Plaintiffs assert that Poloniex and Bittrex were more than just unwitting
facilitators of Defendants’ scheme. For most of the relevant time period,
neither exchange accepted fiat-based deposits nor offered fiat-based exchanges,
and as such, for example, users could not exchange bitcoin for U.S. dollars on
Poloniex or Bittrex. (CAC ¶¶ 164, 172). Thus, USDT was a critical crypto-asset
for both exchanges to support, because it purported to “combine the best
aspects of fiat currency and crypto-assets: [i]t [was] stable and safe like the
27
Case 1:21-md-02989-CMA
Case 1:19-cv-09236-KPF
Document 429-1
Document 182
Entered on
FiledFLSD
09/28/21
Docket
Page 28
10/22/2021
of 127Page 29 of
128
U.S. dollar but also, like other crypto-assets, easily transferable across
different crypto-exchanges, and free from many government regulations.” (Id.
at ¶ 119). Both Poloniex and Bittrex adopted and advertised Tether’s
guarantee that each USDT was backed by a U.S. dollar, and both worked
closely with Tether to list USDT. (See id. at ¶¶ 166-167, 173-174, 318-319). 20
Plaintiffs allege that Poloniex and Bittrex quickly became large and successful
crypto-exchanges, in part as a result of their early adoption of USDT. (Id. at
¶¶ 168, 175).
On the specific issue of knowledge, Plaintiffs allege that the Exchange
Defendants “knew that Bitfinex was the entity depositing massive volumes of
USDT into the 1J1d and 1AA6 addresses because Bittrex and Poloniex had
worked specifically with Bitfinex to enable those transfers.” (CAC ¶ 312). To
Plaintiffs, this agreement is evidenced by the uncommon practice employed by
the Exchange Defendants with respect to the 1J1d and 1AA6 addresses of
allowing Bitfinex to re-use these addresses multiple times, when ordinary
customers “are routinely given a new deposit address when they want to
transfer USDT to their Bittrex or Poloniex account.” (Id. at ¶¶ 313-315).
Similarly, evidence of an unusual and intentional arrangement between the
Exchange Defendants and the DigFinex Defendants is evident in the relative
20 Plaintiffs no longer rely on the claim in paragraph 173 of the Amended Complaint that
trading of USDT on Bittrex began in March 2017. (See Pl. Opp. 9 n.2). However,
Plaintiff continues to rely on its other assertions in paragraph 173 (id.), and as such the
Court must “assume [those] well-pleaded factual allegations to be true,” Faber v. Metro.
Life Ins. Co., 648 F.3d 98, 104 (2d Cir. 2011).
28
Case 1:21-md-02989-CMA
Case 1:19-cv-09236-KPF
Document 429-1
Document 182
Entered on
FiledFLSD
09/28/21
Docket
Page 29
10/22/2021
of 127Page 30 of
128
proportion of USDT traded on the Exchange Defendants’ platform relative to
other crypto-exchanges: the cumulative net flow of USDT to Bittrex and
Poloniex accounted for more than half of all USDT issued, even though trading
of cryptocommodities and other crypto-assets on Bittrex and Poloniex
represented only a small fraction of the overall market. (Id. at ¶ 334). Plaintiffs
contrast the relative saturation of USDT at Poloniex and Bittrex with the
minimal flow of USDT to Binance, the largest crypto-exchange in the world.
(Id. at ¶ 335 (“[W]hen Binance first listed USDT, minimal USDT flowed to its
exchange[,] [a]nd even at the peak of the bubble, Binance experience[d]
relatively little USDT demand.”)).
Plaintiffs further contend that the Exchange Defendants knew that
Bitfinex controlled the 1J1d and 1AA6 addresses “because federal know-your-
customer … requirements prohibit them from accepting such large transfers
from an anonymous source,” and because both exchanges purported to follow
such requirements and stated that they had systems in place to comply with
them. (CAC ¶¶ 320-322). 21 Proceeding from that proposition, Plaintiffs allege
that because the Exchange Defendants knew that Bitfinex controlled the 1J1d
and 1AA6 addresses, and thus had “direct visibility into the daily trading
activity” of Bitfinex’s accounts (id. at ¶ 322), they necessarily knew that USDT
was not being issued in response to organic customer demand (id. at ¶¶ 324-
325). More broadly, Plaintiffs contend that the Exchange Defendants were
21 Prior to the release of the Tether Report, Bitfinex sent $1.5 billon to Poloniex through
the 1J1d address and $1.2 billion to Bittrex through the 1AA6 address. (CAC ¶ 314).
29
Case 1:21-md-02989-CMA
Case 1:19-cv-09236-KPF
Document 429-1
Document 182
Entered on
FiledFLSD
09/28/21
Docket
Page 30
10/22/2021
of 127Page 31 of
128
aware of the unbacked nature of USDT and its use to manipulate crypto-
commodity prices because of their knowledge of the DigFinex Defendants’
cashflow issues, and based on the pattern of transfers and issuances they
could observe:
Because it happened on their exchanges, Bittrex and
Poloniex also knew that Tether and Bitfinex were using
this debased USDT to buy cryptocommodities. They
knew which assets the Tether Defendants were buying
and when, and that the cryptocommodities they
purchased were being transferred back to Bitfinex.
They also knew how those purchases affected
cryptocommodity prices on their own exchanges. Given
the size and regularity of these transfers through a
mechanism they created for that exact purpose and
their perfect visibility into the transactions, Bittrex and
Poloniex knew the manipulative effect of the
transactions on their exchanges.
(Id. at ¶ 331; see also id. at ¶¶ 208, 324-333).
Despite full knowledge of the DigFinex Defendants’ scheme and of their
legal obligations to report suspicious transactions, the Exchange Defendants
did not report such transactions, and instead are alleged to have knowingly
and willingly facilitated such transactions by setting up “bespoke” accounts for
Bitfinex. (CAC ¶ 332). Furthermore, despite being direct competitors of
Bitfinex, the Exchange Defendants purportedly agreed to participate in the
DigFinex Defendants’ scheme because they benefitted from: (i) increased
trading volume caused by market manipulation; (ii) increased commissions
from increased trading; (iii) increased value in their cryptocommodity reserves
due to the artificial price inflation; and (iv) the continued viability of the
30
Case 1:21-md-02989-CMA
Case 1:19-cv-09236-KPF
Document 429-1
Document 182
Entered on
FiledFLSD
09/28/21
Docket
Page 31
10/22/2021
of 127Page 32 of
128
cryptocommodity market, upon which market their entire business model
depended. (Id. at ¶¶ 339-341).
B. Procedural Background
Plaintiffs filed the initial class action complaint in this case, then
captioned Leibowitz v. iFinex Inc. et al., on October 6, 2019. (Dkt. #1).
Thereafter, three related lawsuits were filed. See Young et al. v. iFinex Inc. et
al., No. 20 Civ. 169 (KPF), Dkt. #1 (S.D.N.Y. Jan. 8, 2020); Faubus v. iFinex Inc.
et al., No. 20 Civ. 211 (KPF), Dkt. #1 (S.D.N.Y. Jan. 9, 2020); Ebanks v. iFinex
Inc. et al., No. 20 Civ. 453 (KPF), Dkt. #1 (S.D.N.Y. Jan. 16, 2020).
On January 16, 2020, plaintiffs in the Liebowitz, Young, and Faubus
cases filed a joint letter to consolidate. (Dkt. #61). On January 24, 2020, the
Ebanks Plaintiffs filed a letter joining in the motion to consolidate. Ebanks v.
iFinex Inc. et al., No. 20 Civ. 453 (KPF), Dkt. #8 (S.D.N.Y. Jan. 24, 2020).
Accordingly, by Order dated January 27, 2020, the Court granted the motion to
consolidate (Dkt. #67), and on February 24, 2020, it held oral argument on the
competing motions for the appointment of interim lead class counsel. (See
Minute Entry for February 24, 2020; see also Dkt. #96 (Transcript)). On the
record on February 27, 2020, the Court granted the Leibowitz Plaintiffs’ motion
to appoint interim lead counsel. (See Minute Entry for February 27, 2020; see
also Dkt. #97 (transcript)).
On March 5, 2020, the Court adopted the parties’ proposed schedule for
the submission of Plaintiffs’ anticipated amended class complaint and for
briefing Defendants’ anticipated motions to dismiss. (Dkt. #99). After several
31
Case 1:21-md-02989-CMA
Case 1:19-cv-09236-KPF
Document 429-1
Document 182
Entered on
FiledFLSD
09/28/21
Docket
Page 32
10/22/2021
of 127Page 33 of
128
delays not pertinent to resolving the instant motion, on May 14, 2020, the
Court endorsed the parties’ proposed case management plan and scheduling
order (Dkt. #109); Plaintiffs filed the Amended Complaint, the operative
pleading in this case, on June 5, 2020 (Dkt. #114); and on July 7, 2020, the
Court adopted the parties’ joint Stipulation and Order setting a briefing
schedule for Defendants’ anticipated motions to dismiss (Dkt. #130).
Thereafter, on August 7, 2020, the Exchange Defendants filed a pre-
motion letter seeking to pursue a motion for summary judgment instead of a
motion to dismiss, arguing that the Exchange Defendants had proof that the
1J1d and 1AA6 addresses did not belong to Bitfinex, and instead “belong to an
individual with no apparent connection to Bitfinex, other than as a customer of
its exchange, who is known to engage in a lawful arbitrage strategy.” (Dkt.
#135). Plaintiffs filed a letter in opposition on August 12, 2020. (Dkt. #137).
By Order dated August 14, 2020, the Court denied the Exchange Defendants’
motion to pursue summary judgment before the parties had engaged in any
discovery, and reaffirmed the briefing schedule on Defendants’ anticipated
motions to dismiss set by the July 7, 2020 Stipulation and Order. (Dkt. #139).
On September 3, 2020, the B/T Defendants, the Exchange Defendants,
Potter, and Fowler filed their respective motions to dismiss and supporting
papers. (Dkt. #142-149). On November 5, 2020, Plaintiffs filed a consolidated
memorandum of law in opposition to the motions to dismiss. (Dkt. #154). On
December 17, 2020, the B/T Defendants, the Exchange Defendants, and Potter
filed their reply briefs. (Dkt. #164-166). Fowler filed his reply brief on
32
Case 1:21-md-02989-CMA
Case 1:19-cv-09236-KPF
Document 429-1
Document 182
Entered on
FiledFLSD
09/28/21
Docket
Page 33
10/22/2021
of 127Page 34 of
128
January 19, 2021. (Dkt. 171). 22 Accordingly, the Moving Defendants’ motions
to dismiss are fully briefed and ripe for decision.
DISCUSSION 23
A. The Court Has Personal Jurisdiction over Fowler
While the Exchange Defendants, Potter, and the B/T Defendants do not
contest personal jurisdiction, Defendant Fowler argues that neither RICO, nor
the CEA, nor New York’s long-arm statute allows the Court to exercise personal
jurisdiction over him. (See Fowler Br. 3-11; Fowler Reply 1-6). Fowler further
argues that the assertion of jurisdiction over him would be inconsistent with
principles of due process. (See Fowler Br. 12-13; Fowler Reply 6-7).
“A court facing challenges as to both its jurisdiction over a party and the
sufficiency of any claims raised must first address the jurisdictional question.”
Cohen v. Facebook, Inc., 252 F. Supp. 3d 140, 148 (E.D.N.Y. 2017) (citing
Arrowsmith v. United Press Int’l, 320 F.2d 219, 221 (2d Cir. 1963)). Therefore,
the Court will first address Fowler’s motion to dismiss Plaintiffs’ claims for lack
22 By letter dated December 11, 2020, and in the middle of briefing the instant motion,
counsel for Fowler moved to withdraw as his attorney. (Dkt. #159). After receiving a
letter from Plaintiffs regarding the motion to withdraw (Dkt. #168), and hearing oral
argument on the motion (see Minute Entry for December 22, 2020; see also Dkt. #174
(transcript)), the Court conditionally granted the motion to withdraw pending the
submission of a reply brief on Fowler’s behalf (Dkt. #169). After receiving Fowler’s reply
brief on January 19, 2021 (Dkt. #171), the Court issued an Order confirming that the
motion to withdraw had been fully granted (Dkt. #172). To the best of the Court’s
knowledge, Fowler is now proceeding pro se in this litigation.
23 The parties do not dispute, at least for purposes of the instant motion, that this Court
has subject matter jurisdiction pursuant to 28 U.S.C. §§ 1331, 1337, and 18 U.S.C.
§ 1964(c).
33
Case 1:21-md-02989-CMA
Case 1:19-cv-09236-KPF
Document 429-1
Document 182
Entered on
FiledFLSD
09/28/21
Docket
Page 34
10/22/2021
of 127Page 35 of
128
of personal jurisdiction before addressing the merits of the Moving Defendants’
motions to dismiss for failure to state a claim.
1. Applicable Law
On a motion to dismiss for lack of personal jurisdiction pursuant to
Rule 12(b)(2), the plaintiff bears the burden of showing that the court has
jurisdiction over the defendant. In re Magnetic Audiotape Antitrust Litig., 334
F.3d 204, 206 (2d Cir. 2003); accord In re Terrorist Attacks on Sept. 11, 2001,
714 F.3d 659, 673 (2d Cir. 2013). “Prior to discovery, a plaintiff challenged by
a jurisdiction testing motion may defeat the motion by pleading in good faith,
legally sufficient allegations of jurisdiction. At that preliminary stage, the
plaintiff’s prima facie showing may be established solely by allegations.”
Dorchester Fin. Sec., Inc. v. Banco BRJ, S.A., 722 F.3d 81, 84-85 (2d Cir. 2013)
(citation omitted); accord In re Terrorist Attacks, 714 F.3d at 673 (“In order to
survive a motion to dismiss for lack of personal jurisdiction, a plaintiff must
make a prima facie showing that jurisdiction exists.” (citation omitted)). All
jurisdictional allegations “are construed in the light most favorable to the
plaintiff and doubts are resolved in the plaintiff’s favor[.]” A.I. Trade Fin., Inc. v.
Petra Bank, 989 F.2d 76, 79-80 (2d Cir. 1993). However, the court “will not
draw argumentative inferences in the plaintiff’s favor” and need not “accept as
true a legal conclusion couched as a factual allegation.” In re Terrorist Attacks,
714 F.3d at 673 (citations omitted); accord Licci ex rel. Licci v. Lebanese
Canadian Bank, SAL, 673 F.3d 50, 59 (2d Cir. 2012).
34
Case 1:21-md-02989-CMA
Case 1:19-cv-09236-KPF
Document 429-1
Document 182
Entered on
FiledFLSD
09/28/21
Docket
Page 35
10/22/2021
of 127Page 36 of
128
District courts deciding a motion to dismiss for lack of personal
jurisdiction engage in a two-part analysis. First, the court must establish
whether there is “a statutory basis for exercising personal jurisdiction[.]”
Marvel Characters, Inc. v. Kirby, 726 F.3d 119, 128 (2d Cir. 2013). Second, the
court must decide whether the exercise of jurisdiction comports with due
process. Sonera Holding B.V. v. Çukurova Holding A.S., 750 F.3d 221, 224 (2d
Cir. 2014) (per curiam). In part one of the analysis, the court “applies the
forum state’s personal jurisdiction rules,” unless a federal statute “specifically
provide[s] for national service of process.” PDK Labs, Inc. v. Friedlander, 103
F.3d 1105, 1108 (2d Cir. 1997) (internal quotation marks omitted).
2. Analysis
a. Bases for Exercising Personal Jurisdiction
Plaintiffs proffer several separate bases for exercising personal
jurisdiction over Fowler, including RICO’s jurisdictional provisions, 18 U.S.C.
§ 1965(a)-(b); the CEA’s jurisdictional provision, 7 U.S.C. § 25(c); New York’s
long-arm statute, N.Y. C.P.L.R. (“CPLR”) § 302(a)(1); and conspiracy jurisdiction
as articulated in cases such as Charles Schwab Corporation v. Bank of America
Corporation, 883 F.3d 68 (2d Cir. 2018). Fowler counters that, as a resident of
Arizona, he did not “transact[] his affairs” in New York or otherwise have any
significant connections to the state. (Fowler Br. 3-5, 6-8). 24
24 In their opposition brief, Plaintiffs assert jurisdiction over Fowler under the CEA, which
provides that “[p]rocess ... may be served in any judicial district of which the defendant
is an inhabitant or wherever the defendant may be found.” 7 U.S.C. § 25(c). (See Pl.
Opp. 76). Fowler does not contest that the Court could properly exercise jurisdiction
over him pursuant to this provision, but argues instead that Plaintiffs failed to cite
35
Case 1:21-md-02989-CMA
Case 1:19-cv-09236-KPF
Document 429-1
Document 182
Entered on
FiledFLSD
09/28/21
Docket
Page 36
10/22/2021
of 127Page 37 of
128
i. The Court Has Personal Jurisdiction over Fowler
Pursuant to Section 1965(b)
Turning first to the RICO statute, the Court finds that Plaintiffs have
established personal jurisdiction over Fowler pursuant to Section 1965(b),
which provides in relevant part:
In any action under section 1964 of this chapter in any
district court of the United States in which it is shown
that the ends of justice require that other parties
residing in any other district be brought before the
court, the court may cause such parties to be
summoned, and process for that purpose may be served
in any judicial district of the United States by the
marshal thereof.
18 U.S.C. § 1965(b). Courts have allowed this provision to be triggered only
after a finding that a court has proper jurisdiction over at least one defendant
under Section 1965(a), which permits the institution of a civil RICO action
“against any person ... for any district in which such person resides, is found,
has an agent, or transacts his affairs.” 18 U.S.C. § 1965(a); see also PT United
Can Co. v. Crown Cork & Seal Co., 138 F.3d 65, 71 (2d Cir. 1998); Dandong Old
N.-E. Agric. & Animal Husbandry Co. v. Hu, No. 15 Civ. 10015 (KPF), 2017 WL
3328239, at *6 (S.D.N.Y. Aug. 3, 2017). Courts in this Circuit have concluded
that “[t]he phrase ‘transacts his or her affairs’ contained in § 1965(a) ‘has been
Section 25(c) as a ground for personal jurisdiction in the Amended Complaint and that
any attempt to raise it in opposition to the instant motion is thus improper. (Fowler
Reply 2-3). Plaintiffs did cite Section 25(c) as a basis for venue, but did not explicitly
list it in the paragraph detailing their bases for jurisdiction in the Amended Complaint.
(CAC ¶¶ 44-45). Because, as discussed infra, the Court finds that it has personal
jurisdiction over Fowler pursuant to three independent grounds, the Court need not
address the parties’ dispute over the adequacy of Plaintiffs’ invocation of Section 25(c) of
the CEA.
36
Case 1:21-md-02989-CMA
Case 1:19-cv-09236-KPF
Document 429-1
Document 182
Entered on
FiledFLSD
09/28/21
Docket
Page 37
10/22/2021
of 127Page 38 of
128
held to be synonymous with the “transacts business” language of section 12 of
the Clayton Act’ and ‘[t]he test for transacting business for venue purposes
under the antitrust laws is co-extensive with the test for jurisdiction under New
York CPLR § 302.’” Arabi v. Javaherian, No. 13 Civ. 456 (ERK) (CLP), 2014 WL
3892098, at *8 (E.D.N.Y. May 1, 2014) (quoting City of New York v. Cyco.Net,
Inc., 383 F. Supp. 2d 526, 542 (S.D.N.Y. 2005)).
Here, given the conduct alleged in the Amended Complaint, Plaintiffs
easily establish jurisdiction under Section 1965(a) as to the other RICO
defendants. For example, Plaintiffs adequately pleaded RICO jurisdiction in
New York as to Potter, who is a New York resident, and as to the DigFinex
Defendants, who, inter alia, are alleged to have harmed Plaintiffs in New York
through their manipulation of the cryptocommodity market and to have
directed customers to transfer money to New York-based bank accounts in
furtherance of their scheme. Therefore, because the scheme as alleged has
many ties to New York, the ends of justice are best served by this Court
exercising jurisdiction over Fowler under Section 1965(b). See Hu, 2017 WL
3328239, at *6. 25
25 The parties dispute whether Plaintiffs adequately establish personal jurisdiction over
Fowler under Section 1965(a). Plaintiffs allege that Fowler opened correspondent bank
accounts in New York on the DigFinex Defendants’ behalf, satisfying the “transacts his
affairs” language in Section 1965(a). (See Pl. Opp. 76-77; CAC ¶¶ 359, 495). Fowler
retorts that because the specific bank account Plaintiffs cite in the Amended Complaint
was shuttered at the time the complaint was filed, Plaintiffs fail to satisfy Section
1965(a)’s temporal requirement that “[t]he defendant must ‘transact[] his affairs in the
district at the time the complaint is filed.’” (Fowler Br. 4 (quoting Gates v. Wilkinson,
No. 01 Civ. 3145 (GBD), 2003 WL 21297296, at *2 (S.D.N.Y. June 4, 2003))). The Court
need not resolve this dispute because, as noted herein, the Court has jurisdiction over
Fowler pursuant to Section 1965(b), CPLR § 302(a)(1), and conspiracy jurisdiction.
Furthermore, for the reasons discussed below, the Court dismisses Plaintiffs’ RICO
37
Case 1:21-md-02989-CMA
Case 1:19-cv-09236-KPF
Document 429-1
Document 182
Entered on
FiledFLSD
09/28/21
Docket
Page 38
10/22/2021
of 127Page 39 of
128
ii. The Court Has Personal Jurisdiction over Fowler
Pursuant to CPLR § 302(a)(1)
Turning next to New York’s long-arm statute, the Court determines that
CPLR § 302(a)(1) provides an independent basis for exercising personal
jurisdiction over Fowler. A court may exercise personal jurisdiction over a non-
domiciliary defendant who, either “in person or through an agent ... transacts
any business within the state or contracts anywhere to supply goods or
services in the state.” CPLR § 302(a)(1). A defendant transacts business within
the state if he has “purposefully availed himself of the privilege of conducting
activities within New York and thereby invoked the benefits and protections of
its laws.” United States v. Prevezon Holdings Ltd., 122 F. Supp. 3d 57, 76
(S.D.N.Y. 2015) (internal quotation marks omitted) (quoting Reich v. Lopez, 38
F. Supp. 3d 436, 457 (S.D.N.Y. 2014), aff’d, 858 F.3d 55 (2d Cir. 2017)).
Under New York law, the “transacts business” prong of CPLR 302(a)(1) “may be
satisfied by the defendant’s use of a correspondent bank account in New York,
even if no other contacts between the defendant and New York can be
established, if the defendant’s use of that account was purposeful.” Vasquez v.
Hong Kong & Shanghai Banking Corp., Ltd., 477 F. Supp. 3d 241, 253 (S.D.N.Y.
2020) (quoting Licci v. Lebanese Canadian Bank, 20 N.Y.3d 327, 337 (2012)).
Here, Plaintiffs allege that Fowler created and operated a “shadow”
banking network by opening dozens of bank accounts — using a series of front
claims entirely, making the viability of personal jurisdiction over Fowler under RICO of
minimal importance to future litigation in this action.
38
Case 1:21-md-02989-CMA
Case 1:19-cv-09236-KPF
Document 429-1
Document 182
Entered on
FiledFLSD
09/28/21
Docket
Page 39
10/22/2021
of 127Page 40 of
128
companies and his own name — in order to assist the DigFinex Defendants in
their scheme. (CAC ¶¶ 180-182, 342-363, 492-500). Plaintiffs allege that “the
correspondent account[s] at issue” — including at least one in New York (id. at
¶ 359) — were maintained to “be[] used as an instrument to achieve the very
wrong alleged,” Licci ex rel. Licci v. Lebanese Canadian Bank, SAL, 732 F.3d
161, 171 (2d Cir. 2013), viz., providing the DigFinex Defendants access to the
U.S. banking system in order to cover up their issuance of unbacked USDT and
to help Defendants to manipulate the cryptocommodity market (CAC ¶¶ 180-
182, 342-363).
Fowler cites Licci ex rel. Licci v. Lebanese Canadian Bank, SAL, 732 F.3d
at 172, for the proposition that a defendant’s use of a single bank account in
New York is insufficient to establish personal jurisdiction under CPLR
§ 302(a)(1), because here Plaintiffs allege that Fowler operated an extensive
network across numerous states, minimizing the importance of the New York-
based account. (Fowler Reply 4). However, Licci held that the existence of a
single correspondent bank account in New York was sufficient to establish
personal jurisdiction under CPLR § 302(a)(1), where — as here — plaintiffs
pleaded that the account was “used as an instrument to achieve the very wrong
alleged,” and where the use of the account was “deliberate and recurring.”
Licci, 732 F.3d at 171-72; see also id. at 172 n.7 (suggesting that the “use of a
forum’s banking system as part of an allegedly wrongful course of conduct may
expose the user to suits seeking redress in that forum when that use is an
integral part of the wrongful conduct” (emphasis added)). As such, the Court
39
Case 1:21-md-02989-CMA
Case 1:19-cv-09236-KPF
Document 429-1
Document 182
Entered on
FiledFLSD
09/28/21
Docket
Page 40
10/22/2021
of 127Page 41 of
128
agrees that Plaintiffs have adequately alleged the means by which Fowler used
New York’s “banking system as part of an allegedly wrongful course of
conduct”; that this activity was critical to Fowler’s role in the illicit scheme; and
that therefore these allegations sufficiently establish Fowler’s “‘purposeful
availment of New York’s dependable and transparent banking system, the
dollar as a stable and fungible currency, and the predictable jurisdictional and
commercial law of New York and the United States.’” Licci, 732 F.3d at 171-72
(quoting Licci v. Lebanese Canadian Bank, 20 N.Y.3d at 339); see generally
Vasquez, 477 F. Supp. 3d at 253-55 (analyzing recent judicial decisions
establishing the limits of the exercise of personal jurisdiction pursuant to CPLR
§ 302(a)(1) based on the defendant’s use of New York-based correspondent
bank accounts). 26
26 Plaintiffs allege that at least one of these accounts was in New York. (CAC ¶ 359). The
Amended Complaint lists more than a dozen additional accounts of unknown
provenance, and Plaintiffs allege that discovery will uncover whether any of these
accounts is also in New York. (See id. at ¶ 495). Construing jurisdictional allegations
“in the light most favorable to the plaintiff” and resolving disputes “in the plaintiff’s
favor,” A.I. Trade Fin., Inc. v. Petra Bank, 989 F.2d 76, 79-80 (2d Cir. 1993), the Court
believes that Plaintiffs have plausibly pleaded that there are additional correspondent
bank accounts located in New York. However, as discussed supra and based on the
facts pleaded in the Amended Complaint, Fowler’s use of even the single New York
account on these facts is sufficiently “deliberate and recurring” to establish personal
jurisdiction under CPLR § 302(a)(1), Licci ex rel. Licci v. Lebanese Canadian Bank, SAL,
732 F.3d 161, 171-72 (2d Cir. 2013), and the Court need not rely on the statistical
likelihood of additional New York-based accounts or order jurisdictional discovery into
the issue.
Furthermore, Plaintiffs cite the 2019 indictment of Fowler in a criminal case arising out
of related conduct as additional support for Fowler’s illicit use of correspondent banking
services in New York in connection with the scheme at issue in this case. See United
States v. Fowler, No. 19 Cr. 254 (ALC), Dkt. #4 (S.D.N.Y. Apr. 11, 2019). The Court may
consider the 2019 indictment because it is fairly incorporated by reference in the
Amended Complaint. (See CAC ¶¶ 41 & n.36, 358 & n.208). However, Fowler
maintains that the Court may not consider a later-filed 2020 superseding indictment,
as it is not fairly incorporated in the Amended Complaint. (Fowler Reply 3 n.1). The
40
Case 1:21-md-02989-CMA
Case 1:19-cv-09236-KPF
Document 429-1
Document 182
Entered on
FiledFLSD
09/28/21
Docket
Page 41
10/22/2021
of 127Page 42 of
128
Indeed, as Plaintiffs allege, Fowler’s ability to facilitate the DigFinex
Defendants’ access to the U.S. banking system, including through at least one
bank account in New York, was a critical component of the illicit scheme, as it
allowed Defendants to maintain their fraudulent claim that USDT was fully
backed by U.S. dollars, and thus to manipulate the cryptocommodity market
through the use of unbacked USDT. (CAC ¶¶ 342-363). Such allegations
establish a “substantial relationship between” the conduct alleged and the
claim asserted. See Al Rushaid v. Pictet & Cie, 28 N.Y.3d 316, 329-30 (2016).
Accordingly, the Court exercises specific personal jurisdiction over Fowler on
the independent ground of New York’s long-arm statute.
iii. Plaintiffs Adequately Allege Conspiracy
Jurisdiction over Fowler
Finally, Plaintiffs allege jurisdiction over Fowler by imputing to him the
forum contacts of his co-conspirators, citing Charles Schwab Corporation v.
Bank of America Corporation, 883 F.3d at 87. (Pl. Opp. 82-83). In Schwab, the
Second Circuit clarified that to “alleg[e] a conspiracy theory of jurisdiction[,] the
plaintiff must allege that [i] a conspiracy existed; [ii] the defendant participated
in the conspiracy; and [iii] a co-conspirator’s overt acts in furtherance of the
conspiracy had sufficient contacts with a state to subject that co-conspirator to
jurisdiction in that state.” Id. at 87 (citing Unspam Techs., Inc. v. Chernuk, 716
F.3d 322, 329 (4th Cir. 2013)). As recently noted by a sister court in this
Court has no need to review the disputed 2020 superseding indictment, as it finds
Plaintiffs’ allegations to be sufficient without it.
41
Case 1:21-md-02989-CMA
Case 1:19-cv-09236-KPF
Document 429-1
Document 182
Entered on
FiledFLSD
09/28/21
Docket
Page 42
10/22/2021
of 127Page 43 of
128
District, “the requirements of conspiracy jurisdiction under New York law are
unsettled,” but at a minimum, “the requirements for conspiracy jurisdiction
announced in Schwab appear to be less demanding than those established
under the New York long-arm statute.” In re Platinum & Palladium Antitrust
Litig. (“Platinum II”), 449 F. Supp. 3d 290, 323 n.24 (S.D.N.Y. 2020).
Nevertheless, this Court agrees with Judge Woods’s thorough and well-
reasoned observations that although “[c]ourts have been increasingly reluctant
to extend this theory of [conspiracy] jurisdiction beyond the context of New
York’s long-arm statute,” In re Platinum & Palladium Antitrust Litig.
(“Platinum I”), No. 14 Civ. 9391 (GHW), 2017 WL 1169626, at *49 (S.D.N.Y.
Mar. 28, 2017), “any doubts about the continued viability of conspiracy
jurisdiction in the Second Circuit were resolved by Schwab,” Platinum II, 449 F.
Supp. 3d at 327. Accordingly, the Court considers whether Plaintiffs have
adequately established conspiracy jurisdiction under Schwab. 27
On this point, Fowler argues only that Plaintiffs fail to allege his
participation in a conspiracy. (Fowler Reply 6). But, as discussed in greater
detail below, the Court disagrees and finds that Plaintiffs have adequately
alleged Fowler’s participation in Defendants’ conspiracy. As such, at least on
the record currently before the Court, conspiracy jurisdiction exists here
because Plaintiffs have adequately alleged: (i) a conspiracy, (ii) in which Fowler
participated, and (iii) other Defendants in this case with minimum contacts
27 In any event, and as noted supra, personal jurisdiction over Fowler is proper pursuant
to New York’s long-arm statute.
42
Case 1:21-md-02989-CMA
Case 1:19-cv-09236-KPF
Document 429-1
Document 182
Entered on
FiledFLSD
09/28/21
Docket
Page 43
10/22/2021
of 127Page 44 of
128
with New York, and that those “minimum contacts were in furtherance of the
conspiracy.” Schwab, 883 F.3d at 87. 28
b. Due Process Considerations
A defendant satisfies the “minimum contacts” inquiry by making
sufficient contacts with the forum state. Daimler AG v. Bauman, 571 U.S. 117,
144 (2014). In turn, a defendant makes sufficient contacts by “purposefully
availing himself of the privilege of conducting activities within the forum
State ... thereby invoking the benefits and protections of its laws.” Licci, 673
F.3d at 61 (internal quotation marks and citation omitted). If the defendant
satisfies the “minimum contacts” requirement, courts consider those contacts
in light of five factors to determine whether the exercise of personal jurisdiction
is reasonable:
[i] the burden that the exercise of jurisdiction will
impose on the defendant; [ii] the interests of the forum
state in adjudicating the case; [iii] the plaintiff’s interest
in obtaining convenient and effective relief; [iv] the
interstate judicial system’s interest in obtaining the
most efficient resolution of the controversy; and [v] the
shared interest of the states in furthering substantive
social policies.
28 For example, Plaintiffs allege that Tether, a purported co-conspirator, affirmatively
misrepresented USDT’s backing by stating to the New York State Office of the Attorney
General that “issuances of new [USDT] occur when an investor has requested to
purchase [USDT] by depositing U.S. dollars with Tether the company, or by depositing
U.S. dollars with a trading platform that is authorized to accept dollar deposits in
exchange for USDT.” (CAC ¶ 133). And Plaintiffs allege that Potter, a purported co-
conspirator and New York resident, committed overt acts in furtherance of the
conspiracy by, inter alia, misrepresenting USDT’s backing, concealing the links between
Bitfinex and Tether, and coordinating with the CC Defendants to improperly access U.S.
correspondent banking. (See, e.g., id. at ¶¶ 152-161, 193-258, 219-258).
43
Case 1:21-md-02989-CMA
Case 1:19-cv-09236-KPF
Document 429-1
Document 182
Entered on
FiledFLSD
09/28/21
Docket
Page 44
10/22/2021
of 127Page 45 of
128
Chloe v. Queen Bee of Beverly Hills, LLC, 616 F.3d 158, 164-65 (2d Cir. 2010)
(citing Asahi Metal Indus. Co. v. Super. Ct. Cal., Solano Cnty., 480 U.S. 102, 113
(1987)).
Fowler argues that this Court’s exercise of personal jurisdiction over him
would offend due process because he did not “transact business” within New
York. (See Fowler Reply 6-7; see also Fowler Br. 12-13). However, Fowler’s
due process objections are simply a rehash of his arguments that the Court
cannot exercise jurisdiction over him pursuant to the RICO statute or CPLR
§ 302(a)(1). (Fowler Reply 6-7). Because, as just discussed, the Court rejects
Fowler’s arguments, and finds both that nationwide service is proper pursuant
to Section 1965(b), and that specific jurisdiction is appropriate under CPLR
§ 302(a)(1), the exercise of personal jurisdiction over Fowler would not violate
due process. See Sonterra Cap. Master Fund Ltd. v. Credit Suisse Grp. AG
(“Sonterra I”), 277 F. Supp. 3d 521, 589 (S.D.N.Y. 2017); Prevezon Holdings,
122 F. Supp. 3d at 77.
B. The Moving Defendants’ Motions to Dismiss Are Granted in Part and
Denied in Part
1. Applicable Law
Having addressed Fowler’s jurisdictional challenge to Plaintiffs’ suit, the
Court now turns to the merits of the Moving Defendants’ four motions to
dismiss. “To survive a [Rule 12(b)(6)] motion to dismiss, a complaint must
contain sufficient factual matter, accepted as true, to ‘state a claim to relief
that is plausible on its face.’” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009)
44
Case 1:21-md-02989-CMA
Case 1:19-cv-09236-KPF
Document 429-1
Document 182
Entered on
FiledFLSD
09/28/21
Docket
Page 45
10/22/2021
of 127Page 46 of
128
(quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). “A claim is
facially plausible ‘when the plaintiff pleads factual content that allows the court
to draw the reasonable inference that the defendant is liable for the misconduct
alleged.’” Allco Fin. Ltd. v. Klee, 861 F.3d 82, 94-95 (2d Cir. 2017) (quoting
Iqbal, 556 U.S. at 678). “While Twombly does not require heightened fact
pleading of specifics, it does require enough facts to ‘nudge [a plaintiff’s] claims
across the line from conceivable to plausible.’” In re Elevator Antitrust Litig.,
502 F.3d 47, 50 (2d Cir. 2007) (quoting Twombly, 550 U.S. at 570). In
resolving a Rule 12(b)(6) motion to dismiss, “the only facts to be considered are
those alleged in the complaint, and the court must accept them, drawing all
reasonable inferences in the plaintiff’s favor.” Doe v. Columbia Univ., 831 F.3d
46, 48 (2d Cir. 2016); see generally Goel v. Bunge, Ltd., 820 F.3d 554, 559 (2d
Cir. 2016 (discussing documents a court may properly consider in resolving a
motion to dismiss under Rule 12(b)(6)).
2. Analysis
a. Sherman Act Claims
The Court begins with the four antitrust claims that Plaintiffs advance
under the Sherman Act:
• Monopolization pursuant to Section 2 of the
Sherman Act, against the DigFinex Defendants
(Count One);
• Attempted monopolization pursuant to Section 2
of the Sherman Act, against the DigFinex
Defendants (Count Two);
45
Case 1:21-md-02989-CMA
Case 1:19-cv-09236-KPF
Document 429-1
Document 182
Entered on
FiledFLSD
09/28/21
Docket
Page 46
10/22/2021
of 127Page 47 of
128
• Conspiracy to monopolize pursuant to Section 2
of the Sherman Act, against all Defendants
(Count Three); and
• Agreement in restraint of trade pursuant to
Sections 1 and 3 of the Sherman Act, against all
Defendants (Count Four).
(CAC ¶¶ 389-430). In their motions to dismiss, the Moving Defendants raise
myriad arguments, including that: (i) Plaintiffs lack antitrust standing;
(ii) Plaintiffs fail to allege that Defendants engaged in anticompetitive conduct;
(iii) Plaintiffs inadequately allege Defendants’ monopoly power; (iv) Plaintiffs fail
to allege an intent to monopolize; and (v) Plaintiffs fail to allege an agreement
among Defendants in furtherance of any Sherman Act claim. The Individual
Defendants and Fowler further argue that Plaintiffs fail to implicate them
individually in any purported antitrust violations. The Court first addresses
antitrust injury under the Sherman Act, then turns to each of Plaintiffs’
Sherman Act claims, and concludes by resolving the Individual Defendants’
and Fowler’s arguments against Sherman Act liability. For the reasons that
follow, the Court denies the Moving Defendants’ motions to dismiss Counts
One, Two, and Four, but grants the motions to dismiss Count Three.
i. Plaintiffs Adequately Allege an Antitrust Injury
Defendants first argue that Plaintiffs lack antitrust standing because
Plaintiffs have not adequately alleged an antitrust injury. (B/T Br. 6-7; B/T
Reply 6; Potter Br. 6; Potter Reply 3). Assuming the existence of an antitrust
violation, the Second Circuit has held that to establish antitrust standing, “a
private antitrust plaintiff [must] plausibly ... allege [i] that it suffered a special
46
Case 1:21-md-02989-CMA
Case 1:19-cv-09236-KPF
Document 429-1
Document 182
Entered on
FiledFLSD
09/28/21
Docket
Page 47
10/22/2021
of 127Page 48 of
128
kind of antitrust injury, and [ii] that it is a suitable plaintiff to pursue the
alleged antitrust violations and thus is an ‘efficient enforcer’ of the antitrust
laws.” Gatt Commc’ns, Inc. v. PMC Assocs., LLC, 711 F.3d 68, 76 (2d Cir. 2013)
(citations and internal quotations omitted). “[A]ntitrust standing is a threshold,
pleading-stage inquiry[.]” Id. at 75-76 (quotation omitted). 29
“‘Congress did not intend the antitrust laws to provide a remedy in
damages for all injuries that might conceivably be traced to an antitrust
violation,’” Associated Gen. Contractors of Cal., Inc. v. Cal. State Council of
Carpenters, 459 U.S. 519, 534 (1983) (quoting Hawaii v. Standard Oil Co., 405
U.S. 251, 263 n.14 (1972)), but only for those injuries reflecting an
“anticompetitive effect either of the violation or of anticompetitive acts made
possible by the violation,” Gelboim v. Bank of Am. Corp., 823 F.3d 759, 772 (2d
Cir. 2016) (quoting Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429 U.S. 477,
489 (1977)). Determining whether a plaintiff has suffered an antitrust injury
involves a three-step process:
[i] the plaintiff must “identify the practice complained of
and the reasons such a practice is or might be
anticompetitive”; then [ii] the court must “identify the
actual injury the plaintiff alleges” by “look[ing] to the
ways in which the plaintiff claims it is in a worse
position as a consequence of defendant’s conduct”; and
finally, [iii] the court must “compare the anticompetitive
effect of the specific practice at issue to the actual injury
the plaintiff alleges.”
29 Because the Moving Defendants do not dispute the efficient enforcer prong of the test to
establish antitrust standing, the Court only addresses whether Plaintiffs have
adequately alleged an antitrust injury.
47
Case 1:21-md-02989-CMA
Case 1:19-cv-09236-KPF
Document 429-1
Document 182
Entered on
FiledFLSD
09/28/21
Docket
Page 48
10/22/2021
of 127Page 49 of
128
City of Long Beach v. Total Gas & Power N. Am., Inc., 465 F. Supp. 3d 416, 444-
45 (S.D.N.Y. 2020) (quoting Harry v. Total Gas & Power N. Am., Inc., 889 F.3d
104, 115 (2d Cir. 2018)). Here, Defendants argue that Plaintiffs have not
alleged an injury to competition because price manipulation — without more —
is insufficiently anticompetitive to establish injury under the Sherman Act.
(See B/T Br. 6-8). Plaintiffs counter that antitrust injury is established when a
plaintiff alleges that it transacted in a market subject to price manipulation
and lost money as a result. (Pl. Opp. 12-13). While the Court disagrees with
Plaintiffs’ argument that merely purchasing an item in a market subject to
price manipulation necessarily suffices to demonstrate antitrust injury, it
ultimately concludes that Plaintiffs have sufficiently alleged facts to establish
that the price manipulation by which they claim to have been injured was the
product of an anticompetitive scheme.
The Second Circuit has explained that “when consumers, because of a
conspiracy, must pay prices that no longer reflect ordinary market conditions,
they suffer ‘injury of the type the antitrust laws were intended to prevent and
that flows from that which makes defendants’ acts unlawful.’” Gelboim, 823
F.3d at 772 (quoting Brunswick Corp., 429 U.S. at 489). The nature of an
antitrust injury described in Gelboim maps easily onto Plaintiffs’ claims that
they purchased cryptocommodities at prices artificially produced by
anticompetitive price manipulation. In Gelboim, the Second Circuit held that
the manipulation of LIBOR rates by banks that participated in the LIBOR
benchmarking process gave rise to an antitrust injury on the part of those
48
Case 1:21-md-02989-CMA
Case 1:19-cv-09236-KPF
Document 429-1
Document 182
Entered on
FiledFLSD
09/28/21
Docket
Page 49
10/22/2021
of 127Page 50 of
128
plaintiffs who had transacted in LIBOR-dependent financial instruments. Id. at
772-75. Even though the defendants did not “control the market,” and even
though the plaintiffs were free to negotiate the interest rates attached to certain
financial instruments, the Second Circuit nonetheless found that plaintiffs had
adequately alleged that they were in a “worse position” because of the
defendant banks’ horizontal price-fixing and, therefore, had plausibly alleged
an antitrust injury. Id. at 773-75 (“Even though the members of the price-
fixing group were in no position to control the market, to the extent that they
raised, lowered, or stabilized prices they would be directly interfering with the
free play of market forces.” (quoting United States v. Socony-Vacuum Oil Co.,
310 U.S. 150, 221 (1940) (internal quotation marks omitted))).
Here, although Plaintiffs do not allege the same kind of horizontal price-
fixing as in Gelboim, they do allege that they were harmed by purchasing
cryptocommodities at artificially inflated prices that were the product of
Defendants’ manipulation of the cryptocommodity market, including, inter alia,
Defendants’ conspiracy to use unbacked USDT to simulate organic demand for
cryptocommodities. (See, e.g., CAC ¶¶ 393-394). 30 Defendants’ scheme
30 Defendants argue that the price manipulation alleged in the Amended Complaint was of
the type that “any other participant in the market could have made” (B/T Reply 6
(quoting City of Long Beach v. Total Gas & Power N. Am., Inc., 465 F. Supp. 3d 416, 447
(S.D.N.Y. 2020))), and is thus insufficiently anticompetitive to establish antitrust
standing. The Long Beach plaintiff alleged only a Sherman Act Section 2
monopolization claim, and the Long Beach court found allegations that the defendant
single-handedly “influenced natural gas prices” by “manipulating the Monthly Index
Prices by means of its bidweek transactions” insufficient to establish antitrust injury.
465 F. Supp. 3d at 446. The Long Beach court explained that price manipulation by a
single entity, without more, is insufficient to establish an antitrust injury, because price
manipulation on its own “ha[s] nothing to do with competition,” and because the
plaintiff “d[id] not allege that [defendant’s strategically-timed trades] involved the willful
49
Case 1:21-md-02989-CMA
Case 1:19-cv-09236-KPF
Document 429-1
Document 182
Entered on
FiledFLSD
09/28/21
Docket
Page 50
10/22/2021
of 127Page 51 of
128
purportedly aimed to and succeeded in intentionally creating an
anticompetitive market by artificially inflating prices of cryptocommodities.
Because Plaintiffs have alleged that their “loss[es] stem[ ] from a competition-
reducing aspect or effect of the [Defendants’] behavior,” Atl. Richfield Co. v. USA
Petroleum Co., 495 U.S. 328, 329 (1990) (emphasis omitted) — namely,
Defendants’ agreement to use USDT to manipulate cryptocommodity prices —
Plaintiffs’ alleged “injury is of the type the antitrust laws were intended to
prevent and that flows from that which makes [or might make] Defendants’
acts unlawful” Gatt, 711 F.3d at 76 (citations and internal quotation marks
omitted); see also Merced Irrigation Dist. v. Barclays Bank PLC, 165 F. Supp. 3d
122, 133 (S.D.N.Y. 2016) (holding that plaintiff who purchased electricity at
artificially inflated prices due to Defendants’ price manipulation, “instead of [at
prices derived from] the forces of supply and demand,” alleged antitrust injury),
attainment, maintenance, or exercise of monopoly power.” Id. at 446-47; see also id. at
447 n.163 (declining to hold that antitrust injury can be established by allegations of
paying higher supra-competitive prices or receiving lower sub-competitive prices as a
result of a defendant’s rate-manipulation).
The instant case is distinguishable from Long Beach. First, the Long Beach court noted
that antitrust injury could be established by pleading a conspiracy to manipulate
prices. 465 F. Supp. 3d at 445-46. Here, Plaintiffs do allege a conspiracy among
Defendants to artificially inflate cryptocommodity prices using unbacked USDT, and
provide detailed allegations of Defendants’ scheme to engage in anti-competitive price-
fixing. (See, e.g., CAC ¶¶ 310-366, 417-430). Second, Plaintiffs allege more than
“strategically timed trades,” Long Beach, 465 F. Supp. 3d at 447, in an otherwise
healthy market because the trades here were executed using unbacked USDT with the
intent to manipulate the market. Specifically, Plaintiffs describe how the DigFinex
Defendants’ monopoly control over the stablecoin market allowed them, with the
purported assistance of the CC and Exchange Defendants, to manipulate prices in the
cryptocommodity market by issuing unbacked USDT to create the illusion of price floors
and organic market demand when neither existed, causing appreciable manipulation in
the price of cryptocommodities. (See id. at ¶¶ 393-394). As such, Plaintiffs plead more
than antitrust injury caused by strategically timed purchases that any market
participant could make, which the Long Beach court held was insufficiently
anticompetitive to state a Section 2 claim.
50
Case 1:21-md-02989-CMA
Case 1:19-cv-09236-KPF
Document 429-1
Document 182
Entered on
FiledFLSD
09/28/21
Docket
Page 51
10/22/2021
of 127Page 52 of
128
reconsideration denied, 178 F. Supp. 3d 181 (S.D.N.Y. 2016). The Court
therefore finds that Plaintiffs have adequately pleaded an antitrust injury.
ii. Section 2 Claims
Plaintiffs allege a claim for monopolization, or in the alternative,
attempted monopolization, in violation of Section 2 of the Sherman Act against
the DigFinex Defendants. (CAC ¶¶ 389-409). Plaintiffs further allege a
violation of Section 2 against all Defendants for engaging in a conspiracy to
monopolize the cryptocommodity market. (Id. at ¶¶ 410-416). The Court first
addresses Plaintiffs’ Section 2 claims against the DigFinex Defendants, and
then addresses the broader conspiracy to monopolize claim brought against all
Defendants.
(a) Plaintiffs Adequately Allege a Monopolization
Claim
“[T]o state a claim for monopolization under Section 2 of the Sherman
Act, a plaintiff must establish: ‘[i] the possession of monopoly power in the
relevant market and [ii] the willful acquisition or maintenance of that power as
distinguished from growth or development as a consequence of a superior
product, business acumen, or historic accident.’” PepsiCo, Inc. v. Coca-Cola
Co., 315 F.3d 101, 105 (2d Cir. 2002) (quoting United States v. Grinnell Corp.,
384 U.S. 563, 570-71 (1966)). “Inherent to the second element, there must be
a showing of anticompetitive conduct.” In re Term Commodities Cotton Futures
Litig. (“Cotton Futures I”), No. 12 Civ. 5126 (ALC), 2013 WL 9815198, at *23
(S.D.N.Y. Dec. 20, 2013) (citing Verizon Commc’ns Inc. v. Law Offices of Curtis
51
Case 1:21-md-02989-CMA
Case 1:19-cv-09236-KPF
Document 429-1
Document 182
Entered on
FiledFLSD
09/28/21
Docket
Page 52
10/22/2021
of 127Page 53 of
128
V. Trinko, LLP, 540 U.S. 398, 407 (2004)), on reconsideration in part, 2014 WL
5014235 (S.D.N.Y. Sept. 30, 2014). For the reasons discussed below, the
Court denies the motions to dismiss Plaintiffs’ monopolization claim.
Monopoly Power
“There are two ways a plaintiff can show the possession of monopoly
power: [i] through direct evidence of anticompetitive effects or [ii] by defining a
relevant market and showing defendants’ excess market share.” In re Crude Oil
Commodity Futures Litig., 913 F. Supp. 2d 41, 51 (S.D.N.Y. 2012) (citing
PepsiCo, 315 F.3d at 107). “[M]onopoly power may be established, not only by
proof of a defendant’s market share in a relevant market, but alternatively by
direct evidence of a defendant’s price control or exclusion of competitors from a
particular market in a manner indicative of its possession of monopoly power.”
Shak v. JPMorgan Chase & Co., 156 F. Supp. 3d 462, 482 (S.D.N.Y. 2016); see
also Heerwagen v. Clear Channel Commc’ns, 435 F.3d 219, 227 (2d Cir. 2006);
Geneva Pharm. Tech. Corp. v. Barr Labs. Inc., 386 F.3d 485, 500 (2d Cir. 2004);
Tops Mkts., Inc. v. Quality Mkts., Inc., 142 F.3d 90 (2d Cir. 1998).
Here, Plaintiffs argue that they have adequately pleaded the DigFinex
Defendants’ monopoly power in the cryptocommodity market by establishing
their direct control over prices, which control Plaintiffs argue was accomplished
through Defendants’ “dominat[ion of] the stablecoin market.” (CAC ¶¶ 393-
394; see Pl. Opp. 14-16; see also CAC ¶¶ 34-78 (delimiting the
cryptocommodity market)). In particular, Plaintiffs allege that Defendants
leveraged their domination of the stablecoin market to capture market power in
52
Case 1:21-md-02989-CMA
Case 1:19-cv-09236-KPF
Document 429-1
Document 182
Entered on
FiledFLSD
09/28/21
Docket
Page 53
10/22/2021
of 127Page 54 of
128
the cryptocommodity market by issuing unbacked USDT to simulate organic
market demand for cryptocurrencies. (CAC ¶ 393). The DigFinex Defendants
argue that Plaintiffs must allege more than direct control over prices to
adequately plead monopoly power (B/T Br. 9-10; B/T Reply 2-3), because
“whatever ‘power’ the Defendants had over prices arose from the allegedly
manipulative scheme” (B/T Br. 9), and further argues that the scheme “had
nothing to do with exploiting a market-dominant position to unilaterally move
markets” (B/T Reply 2-3).
Plaintiffs rely primarily on three cases to support their argument that
pleading evidence of Defendants’ ability to control prices is sufficient to
establish monopoly power. First, in In re Crude Oil Commodity Futures
Litigation, the plaintiffs alleged that the defendants amassed a dominant
position in physical crude oil — 92% of the market — and then dumped the
commodity onto the market on certain dates with the purpose and effect of
shifting futures prices, so as to benefit the defendants’ positions in certain
calendar spreads in the futures market. See 913 F. Supp. 2d at 49-50. The
Crude Oil court found these allegations of control over prices in the futures
market — along with allegations of domination in the closely-related physical
commodity market — sufficient to plead monopoly power. Id. at 52-53.
Second, in Cotton Futures I, the plaintiffs alleged that the defendants
acquired 99% of the market share for two futures contracts during the relevant
period, which they used to “effectuate[] a squeeze” that forced others to pay
artificially high prices in order to settle their contracts. 2013 WL 9815198, at
53
Case 1:21-md-02989-CMA
Case 1:19-cv-09236-KPF
Document 429-1
Document 182
Entered on
FiledFLSD
09/28/21
Docket
Page 54
10/22/2021
of 127Page 55 of
128
*23-25. The Cotton Futures I court found that the plaintiffs’ allegations
concerning the defendants’ control over prices and dominant market share
were sufficient to plead monopoly power. Id. at *25; see also In re Term
Commodities Cotton Futures Litig. (“Cotton Futures II”), No. 12 Civ. 5126 (ALC),
2020 WL 5849142, at *35-36 (S.D.N.Y. Sept. 30, 2020) (holding that plaintiffs
established monopoly power on summary judgment by demonstrating control
over prices without reference to defendants’ relative domination of the market).
Third, in Merced Irrigation District v. Barclays Bank PLC, the plaintiff
alleged that the defendant manipulated the daily index prices for electricity by
purchasing swaps contracts, purchasing physical electricity contracts in the
opposite direction from the swaps, and then buying or selling “large quantities
of underlying daily contracts at artificial money-losing prices.” 165 F. Supp. 3d
at 129-30. The Merced plaintiff alleged that the defendant’s “large position in
swap contracts and significant trading in daily contracts” manipulated the
index price. Id. at 131. The Merced court held that these allegations, plus
evidence from the complaint of the correlation between the defendant’s
uneconomical, anti-competitive trading and the index price, established that
the defendant “successfully capture[d] market share sufficient to move index
prices in its favor,” and thus that plaintiff adequately pleaded monopoly power
through the ability to control prices. Id. at 142.
As noted above, “it is well-settled law in this Circuit that ‘pleading a
defendant’s direct control over prices is an alternative to pleading relevant
market share.’” Cotton Futures II, 2020 WL 5849142, at *36 (quoting Merced,
54
Case 1:21-md-02989-CMA
Case 1:19-cv-09236-KPF
Document 429-1
Document 182
Entered on
FiledFLSD
09/28/21
Docket
Page 55
10/22/2021
of 127Page 56 of
128
165 F. Supp. 3d at 141) (collecting cases). However, the DigFinex Defendants
argue that Plaintiffs must still plead some form of relative market share, even
when establishing monopoly power via direct evidence of control over prices.
(B/T Reply 3-4). In support of this argument, Defendants note that in Crude
Oil, the plaintiffs had alleged that the defendants controlled 92% of the market
for physical crude oil when the market at issue was a futures market, and that
in Cotton Futures I, the plaintiffs had alleged temporary control of 99% of the
market at issue. (B/T Reply 3 (first citing Crude Oil, 913 F. Supp. 2d at 52, 57;
then citing Cotton Futures I, 2013 WL 9815198, at *15, 24-25)). Defendants
quote with approval Judge Engelmayer’s synthesis of Crude Oil and Cotton
Futures I in Shak v. JPMorgan Chase & Co., to the effect that “concrete
allegations of a dominant position in either a physical commodity or a related
futures market, combined with significant pricing anomalies that are closely
correlated with defendants’ alleged conduct, may be sufficient to plead
monopoly power.” (Id. at 4 (emphases in B/T Reply) (quoting Shak, 156 F.
Supp. 3d at 485)). The DigFinex Defendants thus argue that Plaintiffs’ failure
to provide “concrete allegations of a dominant position” in the cryptocommodity
market is fatal to their monopolization claim. (Id.).
The Court’s reading of Crude Oil leads it to conclude that Plaintiffs have
alleged monopoly power by showing direct evidence of anticompetitive effects
through price control. In Crude Oil, the plaintiffs alleged that the defendants
had amassed a dominant position in a market closely related to the market at
issue — they dominated the physical crude oil market and manipulated the
55
Case 1:21-md-02989-CMA
Case 1:19-cv-09236-KPF
Document 429-1
Document 182
Entered on
FiledFLSD
09/28/21
Docket
Page 56
10/22/2021
of 127Page 57 of
128
futures market — and Judge Pauley inferred monopoly power in the futures
market from defendants’ ability to control prices. Crude Oil, 913 F. Supp. 2d at
49-52. Similarly, Plaintiffs here allege that the DigFinex Defendants
maintained a “nearly 100% market share” of the stablecoin market, and
leveraged their dominant market share in stablecoin to directly control prices
in the closely-related cryptocommodity market. (CAC ¶¶ 135-136, 272-279,
295-300, 393-394).
Merced offers even greater support for Plaintiffs’ argument. In Merced,
Judge Marrero rejected an argument nearly identical to the one advanced by
Defendants here, and held that allegations of the defendant’s ability to control
prices through manipulative trading, without allegations of its dominant
market share, sufficiently pleaded monopoly power at the motion to dismiss
stage. Merced, 165 F. Supp. 3d at 141-42; see also id. at 142 (“Merced
presents factual allegations that Barclays did successfully capture market
share sufficient to move index prices in its favor.”). Here, Plaintiffs have
similarly provided concrete allegations of the DigFinex Defendants’ direct
control over prices through manipulative trading; unlike in Merced, they have
also provided detailed allegations of how Defendants exploited their monopoly
control over a related market to exert anticompetitive control over prices in the
cryptocommodity market.
While Defendants are correct that, in holding that the plaintiffs
adequately pleaded monopoly power in Cotton Futures, Judge Carter cited both
the defendants’ ability to directly control prices and their “control[] [of] 99% of
56
Case 1:21-md-02989-CMA
Case 1:19-cv-09236-KPF
Document 429-1
Document 182
Entered on
FiledFLSD
09/28/21
Docket
Page 57
10/22/2021
of 127Page 58 of
128
the relative market during the relevant period,” this Court’s reading of Cotton
Futures I does not establish that Judge Carter required satisfaction of both
elements to establish monopoly power. See Cotton Futures I, 2013 WL
9815198, at *24-25. Rather, Judge Carter analyzed first whether the plaintiffs
had established market power by pleading market share, and then whether the
plaintiffs had established monopoly power by pleading the defendants’ “direct
ability to control prices,” ultimately concluding that both sets of allegations
provided support for a finding of monopoly power. Id. Indeed, in Cotton
Futures II, Judge Carter cited only the defendants’ ability to control prices —
and not the defendants’ market share — as grounds for denying summary
judgment with respect to the monopoly power element of the plaintiffs’ Section
2 monopolization claim. 2020 WL 5849142, at *35-36. In any event, while
Plaintiffs have not provided concrete allegations that the DigFinex Defendants
controlled a dominant share of the cryptocommodity market, as noted above,
they have provided detailed allegations of how the DigFinex Defendants used
their dominance of the closely related stablecoin market to manipulate prices
in the cryptocommodity market, bringing this case closer to Crude Oil than to
Defendants’ reading of Cotton Futures I. 31
31 Defendants also cite Long Beach for the proposition that allegations of price
manipulation without more are insufficient to establish monopoly power. (B/T Reply 3
(citing Long Beach, 465 F. Supp. 3d at 447)). For starters, Long Beach did not reach the
issue of monopoly power, dismissing the plaintiff’s Section 2 claim for lack of antitrust
injury. Long Beach, 465 F. Supp. 3d at 446-47. However, to the extent Long Beach
says anything about pleading monopoly power, it is distinguishable for essentially the
same reasons the Court believes the decision is distinguishable with respect to antitrust
injury. Here, Plaintiffs allege more than simple, strategic purchases in an otherwise
healthy market by connecting the DigFinex Defendants’ monopoly control over the
57
Case 1:21-md-02989-CMA
Case 1:19-cv-09236-KPF
Document 429-1
Document 182
Entered on
FiledFLSD
09/28/21
Docket
Page 58
10/22/2021
of 127Page 59 of
128
To be sure, Judge Engelmayer’s synthesis of Crude Oil and Cotton
Futures called for “concrete allegations of a dominant position in either a
physical commodity or a related futures market.” Shak, 156 F. Supp. 3d at 485
(emphases added). In the instant case, however, given the unique qualities of
the cryptocommodity market and its close relationship to the stablecoin
market (see, e.g., CAC ¶¶ 119, 135-136, 165-168, 172, 175), the Court believes
that Plaintiffs’ allegations establishing the DigFinex Defendants’ dominance
over the stablecoin market accord with the rationales of Cotton Futures and
Crude Oil, as articulated by Judge Engelmayer in Shak. Put differently,
Plaintiffs have provided “concrete allegations of [Defendants’] dominant
position” in a “related ... market,” and have pleaded “significant pricing
anomalies that are closely correlated with defendants’ alleged conduct,” which
is “sufficient to plead monopoly power.” Shak, 156 F. Supp. 3d at 485. Here,
Plaintiffs have adequately alleged the DigFinex Defendants’ ability to control
prices in the cryptocommodity market by describing an improper scheme
whereby Defendants leveraged their near-100% share in the stablecoin market
to issue unbacked USDT to simulate organic demand and create artificial price
floors. (See CAC ¶¶ 135-136, 272-279, 295-300, 393-394). 32 At the motion to
dismiss stage, this is sufficient to establish monopoly power.
stablecoin market to their ability to control prices in the cryptocommodity market. (See,
e.g., CAC ¶¶ 393-394).
32 The DigFinex Defendants compare the monthly trading volumes of USDT on the Bittrex
and Poloniex exchanges to the total amount of unbacked USDT they allegedly issued to
argue that, according to the Amended Complaint, Tether did not have a monopoly in the
stablecoin market. (See B/T Reply 4). This fact-based argument fails for at least two
reasons. First, Plaintiffs adequately allege Tether “had nearly 100% market share in
58
Case 1:21-md-02989-CMA
Case 1:19-cv-09236-KPF
Document 429-1
Document 182
Entered on
FiledFLSD
09/28/21
Docket
Page 59
10/22/2021
of 127Page 60 of
128
Willful Acquisition of Monopoly Power
The second element of a Section 2 claim is demonstrating “the willful
acquisition or maintenance of that power as distinguished from growth or
development as a consequence of a superior product, business acumen, or
historic accident.” PepsiCo, 315 F.3d at 105 (quoting Grinnell Corp., 384 U.S.
at 570-71). As discussed above, as part of this element, Plaintiffs must show
anticompetitive conduct. See Verizon Commc’ns Inc., 540 U.S. at 407 (“To
safeguard the incentive to innovate, the possession of monopoly power will not
be found unlawful unless it is accompanied by an element of anticompetitive
conduct.”). “The Second Circuit has defined anticompetitive conduct as
‘conduct without a legitimate business purpose that makes sense only because
it eliminates competition.’” Cotton Futures II, 2020 WL 5849142, at *37
(quoting In re Adderall XR Antitrust Litig., 754 F.3d 128, 133 (2d Cir. 2014)).
Here, none of the DigFinex Defendants’ statements explicitly articulates
an intent to build a monopoly in the cryptocommodity market or to exclude
competition. Plaintiffs argue that “[i]ntentional distortion of a commodities
stablecoin,” citing a statement by Bitfinex’s and Tether’s Chief Technical Officer to that
effect. (See, e.g., CAC ¶¶ 135-136). Second, and more fundamentally, the comparison
of monthly trading volume to the absolute number of unbacked USDT issued by the
DigFinex Defendants says nothing about Defendants’ market share or control of the
stablecoin market. Plaintiffs allege that Tether issued nearly 100% of the stablecoin for
much of the relevant time period, and that much of it was unbacked and issued directly
to Bitfinex, making Plaintiffs’ allegation of the DigFinex Defendants’ monopoly power in
the stablecoin market plausible. (See id. at ¶¶ 136, 208). “A court ruling on a Rule
12(b)(6) motion ‘may not properly dismiss a complaint that states a plausible version of
events merely because the court finds a different version more plausible.’” In re Elec.
Books Antitrust Litig., 859 F. Supp. 2d 671, 688 (S.D.N.Y. 2012) (quoting Anderson
News LLC v. Am. Media, Inc., 680 F.3d 162, 185 (2d Cir. 2012)). Thus, the Court rejects
this fact-based counternarrative at the motion to dismiss stage.
59
Case 1:21-md-02989-CMA
Case 1:19-cv-09236-KPF
Document 429-1
Document 182
Entered on
FiledFLSD
09/28/21
Docket
Page 60
10/22/2021
of 127Page 61 of
128
market through manipulation for profit is anticompetitive,” and that from this,
the Court can infer willful acquisition of monopoly power. (Pl. Opp. 17). The
DigFinex Defendants protest that Plaintiffs must further allege specific facts
regarding their willfulness to “exclude ... other participant[s] [from] entering the
cryptocommodities market,” or to “control[] bitcoin or other cryptocommodity
supply in a way that excluded competitors from participating.” (B/T Br. 10).
Plaintiffs have adequately pleaded willful acquisition by offering evidence
of the DigFinex Defendants’ scheme to leverage their monopoly position in the
stablecoin market to artificially inflate cryptocommodity prices for profit and
anticompetitive effect. (See CAC ¶¶ 394-395). In other words, 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.
Merced, 165 F. Supp. 3d at 143. Specific allegations in support of this finding
include: (i) the timing and volume of Bitfinex’s seemingly irrational purchases
of large quantities of bitcoin with USDT when bitcoin prices dropped by more
than 5% or to certain threshold prices (CAC ¶¶ 277, 289, 295-296);
(ii) evidence of the DigFinex Defendants’ scheme to cover up links between
Tether and Bitfinex (id. at ¶¶ 152-161); (iii) Tether’s and Bitfinex’s repeated
misrepresentations that each USDT was fully backed by one U.S. dollar (id. at
¶¶ 116-117, 119-134, 147-151); and (iv) Devasini’s messages to Crypto Capital
explicitly acknowledging the link between maintaining the illusion of USDT’s
60
Case 1:21-md-02989-CMA
Case 1:19-cv-09236-KPF
Document 429-1
Document 182
Entered on
FiledFLSD
09/28/21
Docket
Page 61
10/22/2021
of 127Page 62 of
128
one-to-one backing and the price of bitcoin (and other cryptocommodities) (id.
at ¶ 362).
Putting it colloquially, Plaintiffs allege that the DigFinex Defendants
“print[ed]” the crypto-equivalent of money “out of thin air” (Pl. Opp. 1), and
then used that counterfeit “money” to purchase cryptocommodities when prices
of those commodities began tanking, increasing Defendants’ market share
through anticompetitive means and, more critically, artificially inflating
cryptocommodity prices divorced from any legitimate market forces. A rational
market actor would be unlikely to make large purchases of cryptocommodities
when the prices of those commodities dropped significantly — as Plaintiffs
allege here (CAC ¶¶ 277, 289, 295-296) — supporting the inference that the
DigFinex Defendants “willful[ly] maint[ained] power” “to distort ordinary forces
of supply and demand” through “uneconomical physical trading positions.”
Merced, 165 F. Supp. 3d at 143.
It remains to be seen whether Plaintiffs will be able to establish willful
acquisition in discovery. But taking the allegations in the Amended Complaint
as true and drawing all reasonable inferences in Plaintiffs’ favor, Plaintiffs
plausibly allege the DigFinex Defendants’ willful intent to acquire monopoly
power. Accordingly, the motions to dismiss Count One are denied.
(b) Plaintiffs Adequately Allege an Attempted
Monopolization Claim
To the extent the DigFinex Defendants “did not or do not possess actual
monopoly power,” Plaintiffs assert a claim for attempted monopolization under
61
Case 1:21-md-02989-CMA
Case 1:19-cv-09236-KPF
Document 429-1
Document 182
Entered on
FiledFLSD
09/28/21
Docket
Page 62
10/22/2021
of 127Page 63 of
128
Section 2 of the Sherman Act. (CAC ¶ 402; see id. at ¶¶ 400-409). “To state a
claim for attempted monopolization in violation of Section 2, a plaintiff must
allege ‘[i] that the defendant has engaged in predatory or anticompetitive
conduct with [ii] a specific intent to monopolize and [iii] a dangerous probability
of achieving monopoly power.’” In re Keurig Green Mountain Single-Serve Coffee
Antitrust Litig., 383 F. Supp. 3d 187, 219 (S.D.N.Y. 2019) (quoting Spectrum
Sports, Inc. v. McQuillan, 506 U.S. 447, 456 (1993)), reconsideration denied,
No. 14 MDL 2542 (VSB), 2019 WL 2603187 (S.D.N.Y. June 25, 2019); see also
Tops Mkts., 142 F.3d at 99. For the reasons discussed above, Plaintiffs have
already adequately pleaded elements one and three of an attempted
monopolization claim, because the DigFinex Defendants “successfully
capture[d] market share sufficient to move [cryptocommodity] prices in [their]
favor.” Merced, 165 F. Supp. 3d at 140, 142 (denying motion to dismiss
attempted monopolization claim).
However, while “the completed offense of monopolization requires only a
general intent, ‘a specific intent to destroy competition or build monopoly is
essential to guilt for the mere attempt.’” Tops Mkts., 142 F.3d at 101 (quoting
Times-Picayune Publ’g Co. v. United States, 345 U.S. 594, 626 (1953)). The
Supreme Court has characterized specific intent as “an intent which goes
beyond the mere intent to do the act[,]” contrasting it with a claim for actual
monopolization, where “evidence of intent is merely relevant to the question
whether the challenged conduct is fairly characterized as ‘exclusionary’ or
‘anticompetitive.’” Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S.
62
Case 1:21-md-02989-CMA
Case 1:19-cv-09236-KPF
Document 429-1
Document 182
Entered on
FiledFLSD
09/28/21
Docket
Page 63
10/22/2021
of 127Page 64 of
128
585, 602 (1985). Here, as noted above, the DigFinex Defendants’ statements
do not contain any explicit attestations of specific intent to build monopoly or
to exclude competitors. Nevertheless, and for the same reasons the Court finds
Plaintiffs’ allegations regarding willful acquisition to be plausible, the Court
believes that Plaintiffs have sufficiently pleaded facts to survive a motion to
dismiss with respect to the intent element of an attempted monopolization
claim. See Tops Mkts., 142 F.3d at 101-02 (holding that specific intent can be
“reasonably infer[red]” from defendants’ uneconomic conduct, which a jury
could determine “was not motivated by a valid business justification” (collecting
cases)).
In sum, to the extent discovery reveals that the DigFinex Defendants did
not possess monopoly power, Plaintiffs may maintain their attempted monopoly
claim and seek to meet the lower threshold required to demonstrate “a
dangerous probability” of achieving monopoly power. Tops Mkts., 142 F.3d at
100). The motions to dismiss Count Two are therefore denied.
(c) Plaintiffs’ Section 2 Conspiracy to
Monopolize Claim Is Dismissed
In contrast to their Section 2 monopolization and attempted
monopolization claims, brought only against the DigFinex Defendants,
Plaintiffs assert a Section 2 conspiracy to monopolize claim against all
Defendants. (CAC ¶¶ 410-416). A claim for conspiracy to monopolize under
Section 2 requires a showing of: “[i] concerted action, [ii] overt acts in
furtherance of the conspiracy, and [iii] specific intent to monopolize.” Elecs.
63
Case 1:21-md-02989-CMA
Case 1:19-cv-09236-KPF
Document 429-1
Document 182
Entered on
FiledFLSD
09/28/21
Docket
Page 64
10/22/2021
of 127Page 65 of
128
Commc’ns Corp. v. Toshiba Am. Consumer Prod., Inc., 129 F.3d 240, 246 (2d
Cir. 1997) (quoting Volvo N. Am. Corp. v. Men’s Int’l Prof’l Tennis Council, 857
F.2d 55, 74 (2d Cir. 1988)); see also Shak, 156 F. Supp. 3d at 490-91 (same).
Furthermore, because “a Section 2 conspiracy claim based on a shared
monopoly theory” is not viable, In re Zinc Antitrust Litig., 155 F. Supp. 3d 337,
382 (S.D.N.Y. 2016) (citing H.L. Hayden Co. of N.Y. v. Siemens Med. Sys., Inc.,
879 F.2d 1005, 1018 (2d Cir. 1989)) (collecting cases), Plaintiffs must allege
that Defendants conspired to confer monopoly power upon a single entity.
Here, the Amended Complaint appears to plead a shared monopoly
theory, inasmuch as Plaintiffs do not specify which entity Defendants
conspired to confer monopoly power upon, and instead plead that all
Defendants “took these [anticompetitive] actions with the specific intent to
obtain market power[.]” (CAC ¶ 414; see generally id. at ¶¶ 410-416). But as
just explained, a shared monopoly theory cannot support a Section 2 claim.
See FLM Collision Parts, Inc. v. Ford Motor Co., 543 F.2d 1019, 1030 (2d Cir.
1976) (explaining that allegations of a “shared monopoly” amount to no more
than a “[Section] 1 claim under another name”); In re Aluminum Warehousing
Antitrust Litig., No. 13 MDL 2481 (KBF), 2014 WL 4277510, at *36 (S.D.N.Y.
Aug. 29, 2014) (same), supplemented, 2014 WL 4743425 (S.D.N.Y. Sept. 15,
2014), and aff’d, 833 F.3d 151 (2d Cir. 2016).
To the extent Plaintiffs argue that the Exchange and CC Defendants
intended to assist the DigFinex Defendants in monopolizing the
cryptocommodity market, the supporting allegations in the Amended
64
Case 1:21-md-02989-CMA
Case 1:19-cv-09236-KPF
Document 429-1
Document 182
Entered on
FiledFLSD
09/28/21
Docket
Page 65
10/22/2021
of 127Page 66 of
128
Complaint fall short. There are no allegations regarding the Exchange
Defendants’ intent to assist the DigFinex Defendants to monopolize, for
example, by refusing to allow transactions to or from other crypto-exchanges or
by restricting other exchanges’ or users’ access to fiat currency,
cryptocommodities, or USDT. Similarly, there are no allegations regarding
Fowler’s intent to assist the DigFinex Defendants in monopolizing the
cryptocommodity market by refusing to provide U.S. correspondent banking to
competitors or providing specialized treatment to the DigFinex Defendants.
As such, Count Three must be dismissed. 33
iii. Plaintiffs Adequately Allege That Defendants
Conspired to Restrain Trade in Violation of
Sections 1 and 3 of the Sherman Act
Separately, Plaintiffs allege that all Defendants conspired to inflate
cryptocommodity prices in violation of Sections 1 and 3 of the Sherman Act.
Section 1 of the Sherman Act prohibits restraints on trade “effected by a
contract, combination, or conspiracy[.]” Twombly, 550 U.S. at 553. 34 “The
critical question for purposes of a Section 1 claim is whether the challenged
33 To the extent the Amended Complaint contains allegations supporting a cognizable
shared monopolization theory, Plaintiffs fail to plead the Exchange and CC Defendants’
specific intent to monopolize, the third element required to establish a Section 2
conspiracy to monopolize claim. Rather, and as discussed in greater detail below,
Plaintiffs’ Amended Complaint more properly describes an agreement, inter alia, in
restraint of trade or to manipulate cryptocommodity prices for profit — not to reduce
competition in that market or exclude competitors from the market. Plaintiffs
accordingly fail to plead the Exchange Defendants’ or the CC Defendants’ (including
Fowler’s) specific intent to monopolize, and as such, this claim must be dismissed for
this independent reason.
34 Section 3 simply “extends the reach of Section 1 to trade or commerce involving U.S.
Territories and the District of Columbia.” Spinelli v. Nat’l Football League, 96 F. Supp.
3d 81, 107 n.10 (S.D.N.Y. 2015).
65
Case 1:21-md-02989-CMA
Case 1:19-cv-09236-KPF
Document 429-1
Document 182
Entered on
FiledFLSD
09/28/21
Docket
Page 66
10/22/2021
of 127Page 67 of
128
anticompetitive conduct ‘stems from independent decision or from an
agreement, tacit or express.’” Merced, 165 F. Supp. 3d at 137 (quoting
Twombly, 550 U.S. at 553). To state a claim under Section 1 of the Sherman
Act, a plaintiff must show “[i] a combination or some form of concerted action
between at least two legally distinct economic entities that [ii] unreasonably
restrains trade.” United States v. Am. Express Co., 838 F.3d 179, 193 (2d Cir.
2016). The Court addresses each element in turn.
Conspiracy
With respect to the first element, “[t]o allege an unlawful agreement
under Section One of the Sherman Act, Plaintiffs must assert either direct
evidence (such as a recorded phone call or email in which competitors agreed
to fix prices) or ‘circumstantial facts supporting the inference that a conspiracy
existed.’” In re Commodity Exch., Inc., 213 F. Supp. 3d 631, 659 (S.D.N.Y.
2016) (quoting Mayor & City Council of Balt. v. Citigroup, Inc., 709 F.3d 129,
136 (2d Cir. 2013)); see also Gelboim, 823 F.3d at 781 (“At the pleading stage, a
complaint claiming conspiracy, to be plausible, must plead ‘enough factual
matter (taken as true) to suggest that an agreement was made[.]’” (quoting
Anderson News, 680 F.3d at 184)). Because “‘conspiracies are rarely evidenced
by explicit agreements,’” however, a conspiracy “‘nearly always must be proven
through inferences that may fairly be drawn from the behavior of the alleged
conspirators.’” Gelboim, 823 F.3d at 781 (quoting Anderson News, 680 F.3d at
183). “The line separating conspiracy from parallelism is indistinct, but may be
crossed with allegations of interdependent conduct, accompanied by
66
Case 1:21-md-02989-CMA
Case 1:19-cv-09236-KPF
Document 429-1
Document 182
Entered on
FiledFLSD
09/28/21
Docket
Page 67
10/22/2021
of 127Page 68 of
128
circumstantial evidence and plus factors.” Id. (internal quotation marks
omitted) (quoting Mayor & City Council of Balt., 709 F.3d at 136). Those
illustrative, non-exhaustive “plus factors” include “[i] a common motive to
conspire; [ii] evidence that shows that the parallel acts were against the
apparent individual economic self-interest of the alleged conspirators; and
[iii] evidence of a high level of interfirm communications.” Id. (internal
quotation marks omitted) (quoting Mayor & City Council of Baltimore, 709 F.3d
at 136). “[A]t the motion-to-dismiss stage, appellants must only put forth
sufficient factual matter to plausibly suggest an inference of conspiracy, even if
the facts are susceptible to an equally likely interpretation.” Id. at 782.
Applying the foregoing principles here, the Court concludes that Plaintiffs
plausibly allege that Defendants engaged in an antitrust conspiracy. Plaintiffs
offer the following allegations to demonstrate the existence of an agreement
between Defendants to manipulate the price of cryptocommodities:
• Defendants’ misrepresentations to the market
that USDT was fully backed by U.S. dollars (CAC
¶¶ 116, 125-135, 147-150, 165-167, 173-174);
• Defendants’ knowing concealment of the
unbacked nature of USDT: for example, the
Exchange Defendants violated regulations that
would have revealed the truth of USDT’s backing
(id. at ¶¶ 331-333), and the CC Defendants
facilitated access to the U.S. banking system to
assist the DigFinex Defendants in preserving the
illusion of USDT’s backing (id. at ¶¶ 342-366);
• The Exchange Defendants’ willing facilitation of
the distribution of unbacked USDT from Bitfinex-
controlled accounts on the Bitfinex exchange, to
Bitfinex-controlled accounts on the Poloniex and
67
Case 1:21-md-02989-CMA
Case 1:19-cv-09236-KPF
Document 429-1
Document 182
Entered on
FiledFLSD
09/28/21
Docket
Page 68
10/22/2021
of 127Page 69 of
128
Bittrex exchanges, because, for example, the
Exchange Defendants were able to see every trade
on their platform and were required to know basic
information about their users pursuant to anti-
money laundering regulations, and as such knew
or should have known that Bitfinex controlled
those accounts and that USDT was not fully
backed (id. at ¶¶ 195-207, 310-324);
• The Exchange Defendants’ knowing facilitation of
the use of that unbacked USDT to buy large
quantities of cryptocommodities with the intent to
inflate the price of those cryptocommodities (id.
at ¶¶ 260-271, 320-324);
• Specific communications about the need to
preserve the illusion of USDT’s full backing to
preserve the value of bitcoin (id. at ¶ 362);
• Close communication and coordination between
the DigFinex Defendants and the Exchange
Defendants with respect to the use of USDT on
their respective crypto-exchanges (id. at ¶¶ 318-
319); and
• The fact that the Exchange Defendants and
DigFinex Defendants coordinated in response to
the publication of the Tether Report to minimize
the conspicuousness of their unusual activity (id.
at ¶¶ 212-215).
Plaintiffs also allege a common intent and common motive, to wit, the intent to
stop the prices of cryptocommodities from falling, and to artificially increase
prices in the cryptocommodity market, because each Defendant’s continued
viability was wholly dependent on the continued growth of the
cryptocommodity market and each stood to profit significantly from the bubble
in the cryptocommodity market. (Id. at ¶¶ 187, 341-340, 364, 366). 35
35 Furthermore, as Plaintiffs note, allegations that the Bitfinex and Tether Defendants
were under investigation by the New York State Attorney General (CAC ¶¶ 367-371; see
68
Case 1:21-md-02989-CMA
Case 1:19-cv-09236-KPF
Document 429-1
Document 182
Entered on
FiledFLSD
09/28/21
Docket
Page 69
10/22/2021
of 127Page 70 of
128
The Moving Defendants’ arguments to the contrary fall short. The B/T
and Exchange Defendants argue that Plaintiffs fail to cite to communications
among Defendants specifically regarding the conspiracy. (B/T Br. 13;
Exchange Br. 9). Yet Plaintiffs do cite evidence of interfirm communications
between the purported conspirators (see CAC ¶¶ 318-319), and further cite
specific evidence of communications about the conspiracy between Devasini
and the CC Defendants (see id. at ¶ 362). More fundamentally, at the motion
to dismiss stage, the failure to quote specific communications is not fatal to a
Section 1 claim if the other circumstantial evidence “‘support[s] the inference
that a conspiracy existed.’” Mayor & City Council of Balt., 709 F.3d at 136
(emphasis omitted).
The B/T Defendants, Exchange Defendants, and Fowler all argue that
they acted in their respective self-interests (see B/T Br. 13, Exchange Br. 12,
Fowler Br. 10, Fowler Reply 16), such that their actions in furtherance of the
agreement, as alleged in the Amended Complaint, could not be viewed as
“against [their] apparent individual economic self-interest[s],’” Gelboim, 823
F.3d at 781. 36 However, Plaintiffs plausibly allege that these groups of
also Dkt. #176), are an additional “plus factor” bolstering the plausibility of a Section 1
claim. See City of Philadelphia v. Bank of Am. Corp., 498 F. Supp. 3d 516, 526
(S.D.N.Y. 2020) (collecting cases).
36 The Exchange Defendants attempt to characterize the allegations as making them
“strictly liable for market manipulation on their exchanges.” (Exchange Reply 4).
However, as noted above, Plaintiffs allege far more than that the DigFinex Defendants
merely carried out market manipulation in the ordinary course of using the Exchange
Defendants’ platforms. For example, Plaintiffs plausibly allege the Exchange
Defendants: (i) knew of and agreed to cover up the unbacked nature of USDT;
(ii) facilitated unusually large and repeated transfers of unbacked USDT to the same
accounts on their exchanges; (iii) knew the DigFinex Defendants controlled those
accounts; and (iv) allowed the DigFinex Defendants to trade large quantities of that
69
Case 1:21-md-02989-CMA
Case 1:19-cv-09236-KPF
Document 429-1
Document 182
Entered on
FiledFLSD
09/28/21
Docket
Page 70
10/22/2021
of 127Page 71 of
128
Defendants acted against self-interest. For example, Plaintiffs allege that:
(i) the Exchange Defendants violated federal and state law to protect the
economic interest of a direct competitor (see CAC ¶¶ 331-333); (ii) the DigFinex
Defendants purchased large quantities of cryptocommodities when prices
began to fall (id. at ¶¶ 277, 289, 295-296); and (iii) Fowler repeatedly violated
banking regulations to further the scheme (id. at ¶¶ 351-361). Additionally, as
noted above, Plaintiffs plead equally plausible economic motives for Defendants
to engage in the scheme: all three groups of Defendants (i.e., the DigFinex,
Exchange, and CC Defendants) were heavily invested in, and completely
dependent on, the continued viability and growth of the cryptocommodity
market. (Id. at ¶¶ 340, 364). Furthermore, Defendants stood to profit by
artificially inflating the value of their cryptocommodity stores. (Id. at ¶¶ 187,
341, 366).
The Exchange Defendants further ask the Court to draw factual
inferences in their favor instead of Plaintiffs’, for example, by (i) accepting the
Exchange Defendants’ proffer that the owner of the 1AA6 and 1J1d accounts
was unaffiliated with Bitfinex and was engaged in lawful arbitrage trading
(Exchange Br. 4-6); (ii) accepting the Exchange Defendants argument that they
had no insight into the common ownership of Tether and Bitfinex, despite
factual allegations in the Amended Complaint to the contrary (id. at 6-7, 10-
11); (iii) rejecting Plaintiffs’ extensive factual allegations that USDT was
unbacked USDT on their exchanges with the intent to inflate the price of
cryptocommodities. (See, e.g., CAC ¶¶ 310-341).
70
Case 1:21-md-02989-CMA
Case 1:19-cv-09236-KPF
Document 429-1
Document 182
Entered on
FiledFLSD
09/28/21
Docket
Page 71
10/22/2021
of 127Page 72 of
128
unbacked (id. at 7); (iv) selecting the Exchange Defendants’ benign
explanations for the unusual and highly suspicious trading activity described
in the Amended Complaint over the explanations offered by Plaintiffs (id. at 8-
9); and (v) inferring a lack of knowledge (rather than culpable knowledge) from
various factual allegations regarding the Exchange Defendants’ purported
insight into trades on their exchanges and into the owners of the accounts
operated on their exchanges (id. at 9-10). As described above, Plaintiffs’ factual
allegations plausibly give rise to the inference of an agreement between
DigFinex and the Exchange Defendants and, “at the motion-to-dismiss stage,
[plaintiffs] must only put forth sufficient factual matter to plausibly suggest an
inference of conspiracy, even if the facts are susceptible to an equally likely
interpretation.” Gelboim, 823 F.3d at 782.
Agreement in Restraint of Trade
Having established that Plaintiffs adequately allege an agreement, the
Court now turns to the second element of a Section 1 claim. Section 1 of the
Sherman Act “does not disallow any and all agreements; it disallows only those
‘in restraint of trade or commerce among the several States.’” In re Elec. Books
Antitrust Litig., 859 F. Supp. 2d 671, 682 (S.D.N.Y. 2012) (quoting 15 U.S.C.
§ 1). Moreover, Section 1 “outlaws only unreasonable restraints.” Leegin
Creative Leather Prods., Inc. v. PSKS, Inc., 551 U.S. 877, 885 (2007). Therefore,
to plead the second element of a Section 1 claim, a plaintiff must show that the
concerted action was unreasonable.
71
Case 1:21-md-02989-CMA
Case 1:19-cv-09236-KPF
Document 429-1
Document 182
Entered on
FiledFLSD
09/28/21
Docket
Page 72
10/22/2021
of 127Page 73 of
128
Price-fixing “conspiracies concentrate the power to set prices among the
conspirators, including the power to control the market and to fix arbitrary and
unreasonable prices.” United States v. Apple, Inc., 791 F.3d 290, 326 (2d Cir.
2015). “[A]ny conspiracy ‘formed for the purpose and with the effect of raising,
depressing, fixing, pegging, or stabilizing the price of a commodity is illegal per
se,’ and the precise ‘machinery employed is immaterial.’” Id. at 327 (quoting
Socony-Vacuum Oil Co., 310 U.S. at 223); see also Merced, 165 F. Supp. 3d at
138 (“Certain restraints on trade, such as minimum price fixing, may have
‘such predictable and pernicious anticompetitive effect, and such limited
potential for procompetitive benefit’ that they are deemed per se unreasonable.”
(quoting State Oil Co. v. Khan, 522 U.S. 3, 17 (1997))). Accordingly, Plaintiffs
have adequately pleaded that the agreement at issue here was “unreasonable”
as they allege it was formed with the intent to engage in price-fixing (see CAC
¶¶ 135-136, 272-279, 295-300, 310-366, 393-394), which is per se
unreasonable, accord Merced, 165 F. Supp. 3d at 138.
***
In sum, although Defendants offer plausible non-collusive explanations
for many of the facts alleged in the Amended Complaint, “[t]he choice between
two plausible inferences that may be drawn from factual allegations is not a
choice to be made by the court on a Rule 12(b)(6) motion.” Anderson News,
680 F.3d at 185. Rather, the question for the Court on a motion to dismiss is
whether Plaintiffs have put forward “enough fact[s] to raise a reasonable
expectation that discovery will reveal evidence of illegal agreement.” Twombly,
72
Case 1:21-md-02989-CMA
Case 1:19-cv-09236-KPF
Document 429-1
Document 182
Entered on
FiledFLSD
09/28/21
Docket
Page 73
10/22/2021
of 127Page 74 of
128
550 U.S. at 556. Taking all of Plaintiffs’ allegations together and drawing all
reasonable inferences in their favor, as the Court must, see, e.g., Cont’l Ore Co.
v. Union Carbide & Carbon Corp., 370 U.S. 690, 696 (1962), the Court
concludes that Plaintiffs meet that burden on their claims brought pursuant to
Sections 1 and 3 of the Sherman Act.
iv. Plaintiffs Adequately Allege Sherman Act Claims
Against the Individual Defendants and Fowler
Each of Defendants Devasini, Velde, Potter, and Fowler argues that the
Amended Complaint fails to allege sufficiently particularized facts to sustain
antitrust claims against them. (See B/T Br. 4 n.1; Potter Br. 6-7; Fowler
Br. 16-17; Potter Reply 3-5; Fowler Reply 9-10). Plaintiffs respond that
“[c]orporate officers may be held ‘personally liable for damages arising from an
antitrust violation’ when they ‘participated in the unlawful acts’ or ‘acquiesced
or ratified the actions of other officers or agents of the corporation who violated
the antitrust laws.’” (Pl. Opp. 24 (quoting Six W. Retail Acquisition, Inc. v. Sony
Theatre Mgmt. Corp., No. 97 Civ. 5499 (DNE), 2000 WL 264295, at *35
(S.D.N.Y. Mar. 9, 2000))). More to the point, Plaintiffs argue that they have
sufficiently alleged the Individual Defendants’ and Fowler’s roles in the
conspiracy and provided evidence from which the Court can infer “‘that they
joined or were members of the alleged conspiracy.’” (Id. (quoting In re Air Cargo
Shipping Servs. Antitrust Litig., No. 06 MDL 1775 (JG) (VVP), No. 10 Civ. 639
(JG) (VVP), 2010 WL 10947344, at *8 (E.D.N.Y. Sept. 22, 2010))).
73
Case 1:21-md-02989-CMA
Case 1:19-cv-09236-KPF
Document 429-1
Document 182
Entered on
FiledFLSD
09/28/21
Docket
Page 74
10/22/2021
of 127Page 75 of
128
The Court agrees with Plaintiffs that the Amended Complaint sufficiently
alleges each Individual Defendant’s involvement in the conspiracy to defeat a
motion to dismiss. For example, Plaintiffs argue that the Individual
Defendants dominated DigFinex, Tether, and Bitfinex through their leadership
positions (see CAC ¶¶ 23-24, 34-36, 478-480), and further allege the following
specific allegations regarding their individual participation in the antitrust
schemes:
• Potter, Devasini, and Velde concealed their
simultaneous control over Bitfinex, Tether, and
DigFinex, a key element of the scheme to conceal
the unbacked nature of USDT and to use USDT
to inflate cryptocommodity prices and monopolize
the cryptocommodity market (id. at ¶¶ 152-161);
• On April 5, 2017, Velde stated under penalty of
perjury that each USDT was fully backed by a
corresponding U.S. dollar, furthering the
conspiracy (id. at ¶ 130);
• On October 15, 2018, Devasini pleaded with
Crypto Capital to “move at least 100M” to the
DigFinex Defendants to honor client redemption
requests, and warned that failure to do so would
reveal that USDT was unbacked, which would
“tank” the price of bitcoin (id. at ¶ 362); and
• Potter made multiple, specific public statements
of Tether’s intent to evade banking laws and anti-
money laundering regulations, especially around
the time the DigFinex Defendants lost access to
U.S. correspondent banking, suggesting his
knowledge of and active participation in the illicit
scheme (id. at ¶¶ 343-347).
With particular respect to Fowler, Plaintiffs plead that he was “an
employee, agent, or partner of Defendant Crypto Capital” (CAC ¶ 41), and that
74
Case 1:21-md-02989-CMA
Case 1:19-cv-09236-KPF
Document 429-1
Document 182
Entered on
FiledFLSD
09/28/21
Docket
Page 75
10/22/2021
of 127Page 76 of
128
he was at the center of Crypto Capital’s “scheme to operate a shadow bank on
behalf of crypto-exchanges in which hundreds of millions of dollars passed
through accounts controlled by him in jurisdictions around the world” (id. at
¶ 352 (alteration omitted); see also id. at ¶ 351). Plaintiffs also advance specific
allegations as to Fowler’s involvement in the antitrust conspiracy, for example,
that he set up specific shell companies and bank accounts to facilitate the
DigFinex Defendants’ scheme throughout the relevant period. (See id. at
¶¶ 354-363).
These allegations, considered in the aggregate, are sufficiently specific to
survive a motion to dismiss. This is not a case where Plaintiffs allege only that
the Individual Defendants “had knowledge of [their employers’] conduct,
approved of it, and participated in it,” which “might not by itself give rise to
individual liability under the Sherman Act.” Air Cargo, 2010 WL 10947344, at
*8. While Plaintiffs do not allege multiple specific communications in
furtherance of the conspiracy from any of the Individual Defendants or Fowler,
the Court can nonetheless infer the Individual Defendants’ involvement in
controlling DigFinex, Tether, and Bitfinex from the allegations in the Amended
Complaint, as well as Fowler’s control over Crypto Capital. See id. (explaining
that factual allegations that individual’s employer joined alleged conspiracy are
“more suggestive of [the individual] having joined and directly participated in
the conspiracy”). Furthermore, Plaintiffs provide specific allegations as to
Fowler’s and each Individual Defendant’s actions in furtherance of the antitrust
scheme. See Precision Assocs., Inc. v. Panalpina World Transp. (Holding) Ltd.,
75
Case 1:21-md-02989-CMA
Case 1:19-cv-09236-KPF
Document 429-1
Document 182
Entered on
FiledFLSD
09/28/21
Docket
Page 76
10/22/2021
of 127Page 77 of
128
No. 08 Civ. 42 (JG) (VVP), 2012 WL 3307486, at *2 (E.D.N.Y. Aug. 13, 2012)
(“[O]nly ‘slight evidence’ is necessary to connect a defendant to an antitrust
conspiracy once the conspiracy is established[.]” (collecting cases)).
b. Commodities Exchange Act Claims
The Court now turns to Plaintiffs’ three claims against all Defendants
under the Commodities Exchange Act:
• market manipulation in violation of 7 U.S.C. §§ 9,
25 and CFTC Rule 180.1(a) (Count Five); 37
• principal-agent liability in violation of 7 U.S.C.
§ 2(a)(1) (Count Six); and
• aiding and abetting manipulation in violation of 7
U.S.C. § 25(a)(1) (Count Seven). 38
37 As discussed further below, Plaintiffs allege a market manipulation claim under two
theories: first, that Defendants engaged in price manipulation, and second, that
Defendants utilized a “manipulative device.”
38 In the Amended Complaint, the headings for each of Plaintiffs’ three CEA claims specify
that Plaintiffs assert each claim “Against All Defendants.” However, Plaintiffs failed to
include the Exchange Defendants or the CC Defendants in the ad damnum clauses for
each of the three CEA causes of action. (See CAC ¶¶ 439, 444, 448). Plaintiffs also
failed to specify that the Exchange Defendants or the CC Defendants “had the ability to
cause, and did cause, artificial prices” in support of their price manipulation claim.
(See id. at ¶ 434). Fowler argues that Plaintiffs failed to assert any CEA claims against
him because they omitted him from each of the ad damnum clauses and pleaded no
specific references to him in the paragraphs asserting the CEA claims. (Fowler Reply 8-
9). More broadly, Fowler argues that he did not have “fair notice” of the CEA claims
asserted against him, and that it would be improper to allow Plaintiffs to assert these
“new claims” for the first time in an opposition to a motion to dismiss. (Id.). For the
same reasons, the Exchange Defendants argue that Plaintiffs failed to assert a price
manipulation claim against them. (See Exchange Reply 9).
The Court declines to dismiss Plaintiffs’ CEA claims against Fowler or their price
manipulation claim against the Exchange Defendants on this ground. “Federal Rule of
Civil Procedure 8(a)(2) requires only ‘a short and plain statement of the claim showing
that the pleader is entitled to relief,’ in order to ‘give the defendant fair notice of what
the ... claim is and the grounds upon which it rests[.]’” Bell Atl. Corp. v. Twombly, 550
U.S. 544, 555 (2007) (alteration in Twombly) (quoting Fed. R. Civ. P. 8(a)(2)). The
Amended Complaint explicitly states that CEA claims are asserted against “All
Defendants,” giving Fowler and the Exchange Defendants fair notice that CEA claims
are asserted against them.
76
Case 1:21-md-02989-CMA
Case 1:19-cv-09236-KPF
Document 429-1
Document 182
Entered on
FiledFLSD
09/28/21
Docket
Page 77
10/22/2021
of 127Page 78 of
128
Plaintiffs assert these claims on behalf of a subclass of “[a]ll persons or entities
that purchased or otherwise acquired Cryptocommodity Futures in the United
States or its territories at any time from February 17, 2015, through the
present and were injured thereby.” (CAC ¶ 377). Defendants move to dismiss
Plaintiffs CEA claims in their entirety. The Court first addresses the Moving
Defendants’ argument that Plaintiffs lack standing under the CEA and then
addresses each of Plaintiffs’ CEA claims. As explained below, the Court denies
the Moving Defendants’ motions to dismiss Plaintiffs’ CEA claims.
i. Plaintiffs Adequately Allege CEA Standing
Section 22 of the CEA creates a private right of action for any person
“who purchased or sold a [futures contract] or swap if the violation
constitutes ... a manipulation of the price of any such contract or swap or the
price of the commodity underlying such contract or swap.” 7 U.S.C.
§ 25(a)(1)(D). To have standing to sue under the CEA, the plaintiff must show
The Exchange Defendants were not named in any of the three CEA claim ad damnum
clauses, and yet they still opposed the market manipulation-manipulative device claim,
the aiding and abetting claim, and the principal-agent liability claim. (See Exchange
Br. 17-20). This fact undermines their argument that they had no notice of the price
manipulation claim. Furthermore, Plaintiffs included allegations of the Exchange
Defendants’ ability to control prices in support of their Section 1 Sherman Act claims
(see CAC ¶¶ 419, 424-425, 428-429), which allegations were then incorporated into
Plaintiffs’ CEA claims (see id. at ¶ 431).
Plaintiffs also advanced extensive factual allegations in support of Fowler’s involvement
in the scheme to manipulate cryptocommodity prices, and as such, Fowler had
adequate notice of the grounds upon which Plaintiffs’ CEA claims rested, and Plaintiffs
noted that they asserted all CEA claims against all Defendants, giving Fowler adequate
notice that he needed to respond to the claims. The Court therefore declines to find
that Fowler had inadequate notice of the CEA claims asserted against him. Finally,
neither Fowler nor the Exchange Defendants cite any case for the proposition that a
failure to list a specific defendant in an ad damnum clause while otherwise signaling an
intent to assert the claim against the omitted defendant constitutes inadequate notice of
the claim.
77
Case 1:21-md-02989-CMA
Case 1:19-cv-09236-KPF
Document 429-1
Document 182
Entered on
FiledFLSD
09/28/21
Docket
Page 78
10/22/2021
of 127Page 79 of
128
that he or she suffered “actual damages” as a result of the manipulation. Id.
§ 25(a)(1); see also Platinum I, 2017 WL 1169626, at *28. “To establish ‘actual
damages’ a plaintiff must show an ‘actual injury caused by the violation.’” In re
London Silver Fixing, Ltd., Antitrust Litig. (“In re Silver”), 213 F. Supp. 3d 530,
564 (S.D.N.Y. 2016) (quoting In re LIBOR-Based Fin. Instruments Antitrust Litig.
(“LIBOR II”), 962 F. Supp. 2d 606, 620 (S.D.N.Y. 2013)); see also In re Amaranth
Nat. Gas Commodities Litig. (“Amaranth II”), 269 F.R.D. 366, 379 (S.D.N.Y.
2010) (finding that plaintiffs had standing to sue under the CEA because they
established that they “suffered net losses ... caused by the [defendants’] alleged
[price] manipulation”).
When “CEA claims are based on discrete, episodic instances of
manipulation, plaintiffs must allege that they ‘engaged in a transaction at a
time during which prices were artificial as a result of defendants’ alleged ...
manipulative conduct, and that the artificiality was adverse to their position.’”
In re Silver, 213 F. Supp. 3d at 564 (quoting LIBOR II, 962 F. Supp. 2d at 622).
Of potential significance to the instant motion, however, where the CEA claims
are based on persistent manipulation, CEA plaintiffs may establish actual
injury at the motion to dismiss stage by pleading that they engaged in
transactions during the period of sustained manipulation because prices were
“allegedly artificial throughout the Class Period.” LIBOR II, 962 F. Supp. 2d at
622; see also Platinum I, 2017 WL 1169626, at *28.
Here, the parties agree that Plaintiff Goldshtein is the only named
plaintiff alleged to have purchased cryptocommodity futures during the Class
78
Case 1:21-md-02989-CMA
Case 1:19-cv-09236-KPF
Document 429-1
Document 182
Entered on
FiledFLSD
09/28/21
Docket
Page 79
10/22/2021
of 127Page 80 of
128
Period. (See Pl. Opp. 26; B/T Reply 8; see also CAC ¶ 22). As relevant here,
Plaintiffs allege that “between January 16, 2018[,] and June 3, 2020, Pinchas
Goldshtein purchased 629 bitcoin futures positions,” “the prices of which
[futures] had been artificially inflated by Defendants’ market manipulation and
as a result suffered economic losses and actual damages.” (CAC ¶ 22).
The Moving Defendants argue that Plaintiffs’ claims are based on
“discrete, episodic instances of manipulation” and that they therefore fail to
allege loss with sufficient specificity. (See, e.g., B/T Br. 15-17, Exchange
Br. 15-16; B/T Reply 8-11). Relatedly, they argue that Plaintiffs must plead
facts about the specific purchases that Goldshtein made and connect those
individual purchases to Defendants’ misconduct in order to prove that
Goldshtein actually suffered a loss on any of the transactions. (See, e.g., B/T
Br. 16; Exchange Br. 15-16; B/T Reply 8-9). Plaintiffs, in contrast,
characterize their claims as based on “persistent manipulation,” obviating their
need to plead facts establishing that Goldshtein was injured by any specific
transaction. (Pl. Opp. 26-27). The Court agrees with Plaintiffs that the
allegations here make out a claim for persistent manipulation rather than for
episodic manipulation, and that the allegations are sufficient to survive a
motion to dismiss.
While Defendants correctly note that Plaintiffs assert that the
manipulation was accomplished through “‘massive, carefully timed’
cryptocommodity purchases” (B/T Br. 16 (emphasis in B/T Br.) (quoting CAC
¶¶ 3, 10)), they are wrong in suggesting that Plaintiffs allege the market as
79
Case 1:21-md-02989-CMA
Case 1:19-cv-09236-KPF
Document 429-1
Document 182
Entered on
FiledFLSD
09/28/21
Docket
Page 80
10/22/2021
of 127Page 81 of
128
having operated free from artificial influence during the intervening time
periods. Quite to the contrary, Plaintiffs allege that Defendants’ carefully timed
purchases were intended to, and had the effect of, simulating organic demand
and creating artificial price floors, causing prices to inflate more or less
persistently, and creating a protracted bubble in the cryptocommodity market,
which bubble burst around early 2018. (See CAC ¶¶ 95-96, 135-136, 272-279,
295-300, 393-394, 437). Goldshtein alleges that he purchased
cryptocommodity futures starting in January 2018, right around the time the
bubble burst, and continued purchasing futures through the filing of the
Amended Complaint. (Id. at ¶ 22; see also id. at ¶¶ 95-96). As such, and
accepting the allegations in the Amended Complaint as true, the Court can
infer that Goldshtein suffered actual damages as to any of his purchases, as
each purchase was made at an artificially inflated price that continued to fall,
all as a result of Defendants’ manipulation.
Defendants argue that the persistent manipulation cases on which
Plaintiffs rely involved more concrete allegations regarding the purported
injurious transactions than those advanced here. (See, e.g., B/T Reply 10-11
(citing Harry, 889 F.3d at 112; Platinum I, 2017 WL 1169626, at *28; LIBOR II,
936 F. Supp. 2d at 718-19)). While Plaintiffs certainly could have provided
more detailed, concrete allegations as to the dates and times of Goldshtein’s
purchases, particularly given the public nature of the crypto-asset transactions
at issue here (see CAC ¶¶ 104, 118), nothing in the cited decisions requires
Plaintiffs to plead details about specific transactions if, under a persistent
80
Case 1:21-md-02989-CMA
Case 1:19-cv-09236-KPF
Document 429-1
Document 182
Entered on
FiledFLSD
09/28/21
Docket
Page 81
10/22/2021
of 127Page 82 of
128
manipulation theory, Plaintiffs’ allegations at the motion to dismiss stage
adequately establish that any of those transactions caused Goldshtein actual
injury. That is the case here, and accordingly the Moving Defendants’ motions
to dismiss Plaintiffs’ CEA claims for lack of standing is denied. However, the
Court notes that, while “at the pleading stage, [Plaintiffs] have adequately
alleged that they were damaged by [Defendants’] manipulation” of the
cryptocommodity market, “[i]t ultimately remains [P]laintiffs’ burden to prove
through reliable evidence that they suffered actual loss based on defendants’
manipulation[.]” Sullivan v. Barclays PLC, No. 13 Civ. 2811 (PKC), 2017 WL
685570, at *31 (S.D.N.Y. Feb. 21, 2017). 39
ii. Plaintiffs Adequately Allege Market Manipulation
Plaintiffs assert claims under CEA Sections 6(c)(1) and 22, 7 U.S.C.
§§ 9, 25, which make it unlawful for “any person, directly or indirectly, to use
or employ or attempt to use or employ ... any manipulative or deceptive device
39 The Exchange Defendants argue that Plaintiffs’ CEA claims against them are time-
barred because “publication of the Tether Report in January 2018 [and subsequent
stories in major media outlets regarding the Tether Report] triggered the two-year
statute of limitations for CEA claims” by putting Goldshtein on inquiry notice, thus
“making the June 2020 CAC untimely.” (Exchange Reply 6; see also Exchange Br. 13-
14). For the reasons set forth in Plaintiffs’ opposition brief, the Court believes that the
publication of the Tether Report and news stories about that report are insufficient to
find that Goldshtein was on inquiry notice of the Exchange Defendants’ role in the
scheme as a matter of law at this early stage in the litigation. (See Pl. Opp. 38-41).
Defendant Potter further argues that Plaintiffs do not have standing to advance CEA
claims against him because he stopped working for Tether and Bitfinex “by late
February 2018, shortly after Plaintiff Goldshtein began transacting in bitcoin futures.”
(Potter Br. 8). However, Potter does not contest that Goldshtein purchased Bitcoin
futures in January 2018, before Potter stepped down from his role working for the
DigFinex Defendants. (See Potter Reply 5 n.2; see also CAC ¶ 22). Accordingly, the
Court declines to dismiss Plaintiffs’ CEA claims against Potter on standing grounds, for
the same reasons that the Court declines to dismiss Plaintiffs’ claims against the other
DigFinex Defendants for lack of CEA standing.
81
Case 1:21-md-02989-CMA
Case 1:19-cv-09236-KPF
Document 429-1
Document 182
Entered on
FiledFLSD
09/28/21
Docket
Page 82
10/22/2021
of 127Page 83 of
128
or contrivance,” and CFTC Rule 180.1(a), which in relevant part makes it
unlawful for “any person ... to intentionally or recklessly” “[m]ake, or attempt to
make, any untrue or misleading statement of a material fact or to omit to state
a material fact necessary in order to make the statements made not untrue or
misleading; [or] ... [e]ngage, or attempt to engage, in any act, practice, or
course of business, which operates or would operate as a fraud or deceit,” 17
C.F.R. § 180.1(a).
Manipulation claims that sound in fraud, including those advanced by
Plaintiffs here (see CAC ¶ 437; see also Pl. Opp. 28), are evaluated under the
more stringent pleading requirements of Federal Rule of Civil Procedure 9(b), In
re Amaranth Nat. Gas Commodities Litig. (“Amaranth III”), 730 F.3d 170, 180-81
(2d Cir. 2013); see also Platinum I, 2017 WL 1169626, at *30; In re Commodity
Exch., Inc., 213 F. Supp. 3d at 667-68. “Despite the generally rigid
requirement that fraud be pleaded with particularity, the Second Circuit has
recognized that ‘[a] claim of manipulation ... can involve facts solely within the
defendant’s knowledge; therefore, at the early stages of litigation, the plaintiff
need not plead manipulation to the same degree of specificity as a plain
misrepresentation claim.’” Platinum I, 2017 WL 1169626, at *30 (quoting ATSI
Commc’ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 102 (2d Cir. 2007)). “As a
result, the heightened pleading standard under 9(b) ‘is generally relaxed in the
context of manipulation-based claims, where the complaint must simply
specify what manipulative acts were performed, which defendants performed
them, when the manipulative acts were performed, and what effect the scheme
82
Case 1:21-md-02989-CMA
Case 1:19-cv-09236-KPF
Document 429-1
Document 182
Entered on
FiledFLSD
09/28/21
Docket
Page 83
10/22/2021
of 127Page 84 of
128
had on the market for the securities at issue.’” Id. (quoting In re Silver, 213 F.
Supp. 3d at 566).
Here, Plaintiffs advance two theories of liability for market manipulation:
they assert that Defendants: (i) engaged in price manipulation and (ii) utilized a
“manipulative device” pursuant to 7 U.S.C. § 25(a)(1)(D)(i). The Court
addresses each theory in turn.
(a) Price Manipulation
“To state a claim for market manipulation under the CEA, Plaintiffs must
allege that: [i] the defendant ‘possessed an ability to influence market prices;’
[ii] ‘an artificial price existed;’ [iii] the defendant ‘caused the artificial price; and’
[iv] the defendant ‘specifically intended to cause the artificial price.’” Platinum
I, 2017 WL 1169626, at *31 (quoting Amaranth III, 730 F.3d at 173); see also In
re Commodity Exch., Inc., 213 F. Supp. 3d at 668. This final element of scienter
“can be pled by ‘alleging facts [i] showing that the defendants had both motive
and opportunity to commit the fraud or [ii] constituting strong circumstantial
evidence of conscious misbehavior or recklessness.’” In re Commodity Exch.,
Inc., 213 F. Supp. 3d at 670 (quoting In re Amaranth Nat. Gas Commodities
Litig. (“Amaranth I”), 587 F. Supp. 2d 513, 529 (S.D.N.Y. 2008)).
The B/T Defendants argue that Plaintiffs fail to plead fraud with the
particularity required to satisfy Rule 9(b). (See, e.g., B/T Br. 17-18). The Court
disagrees. The Amended Complaint provides sufficient details about
Defendants’ purportedly manipulative trading, including charts, graphs, and
specific examples illustrating how and when Defendants allegedly utilized
83
Case 1:21-md-02989-CMA
Case 1:19-cv-09236-KPF
Document 429-1
Document 182
Entered on
FiledFLSD
09/28/21
Docket
Page 84
10/22/2021
of 127Page 85 of
128
unbacked USDT to inflate cryptocommodity prices. (See CAC ¶¶ 265-270, 272-
276). While Plaintiffs did not include every purportedly manipulative transfer
in the Amended Complaint, their allegations easily satisfy the “relaxed”
Rule 9(b) pleading standard for price manipulation claims. See Platinum I,
2017 WL 1169626, at *32 (finding that pleading “examples showing predictable
price movements in the platinum and palladium derivatives market” satisfies
Rule 9(b) in the context of a price manipulation claim).
The B/T Defendants also argue that Plaintiffs fail to plead each of the
four elements of a price manipulation claim, essentially recasting their
arguments for dismissal of Plaintiffs’ antitrust claims, viz., that Plaintiffs have
not adequately pleaded how Defendants’ use of USDT caused price
manipulation in the cryptocommodity market, and that Defendants lacked the
specific intent to manipulate prices. (See B/T Br. 18-21; B/T Reply 11-12).
The Exchange Defendants assert similar arguments, including that Plaintiffs
have not adequately alleged their ability to influence the market, that their
actions actually did influence prices, or that they had the requisite scienter.
(Exchange Reply 9 n.5).
For the reasons discussed supra with respect to Plaintiffs’ Section 1
Sherman Act claim, the Court disagrees and finds that Plaintiffs have
established the elements of a price manipulation claim by plausibly alleging
how Defendants conspired to manipulate cryptocommodity prices using
unbacked USDT, that they did artificially inflate prices, and that Defendants
acted with the requisite intent. As noted above, Plaintiffs have plausibly
84
Case 1:21-md-02989-CMA
Case 1:19-cv-09236-KPF
Document 429-1
Document 182
Entered on
FiledFLSD
09/28/21
Docket
Page 85
10/22/2021
of 127Page 86 of
128
alleged how the B/T Defendants used unbacked USDT to inflate
cryptocommodity prices, and that they engaged in misconduct to achieve that
goal (see CAC ¶¶ 135-136, 272-279, 295-300, 393-394); and have further
alleged how the Exchange Defendants advanced the scheme by knowingly
facilitating and concealing the B/T Defendants’ manipulative trading with the
specific goal of inflating the price of cryptocommodities (see id. at ¶¶ 310-341).
Similarly, Plaintiffs have plausibly alleged the CC Defendants’ role as providers
of shadow banking services to the DigFinex Defendants and have pleaded facts
demonstrating that the CC Defendants knew their role was critical to
maintaining the illusion that USDT was fully backed, and, by extension, to
artificially inflating cryptocommodity prices. (See id. at ¶¶ 342-366). Whether
discovery will confirm these allegations remains to be seen, but at the motion
to dismiss stage, the Court finds Plaintiffs have adequately pleaded price
manipulation.
(b) Manipulative Device
Plaintiffs also assert a market manipulation claim against Defendants
under a manipulative device theory pursuant to 7 U.S.C. § 25(a)(1)(D)(i) and
CFTC Rule 180.1. Section 25(a)(1)(D)(i) provides a remedy for:
the use or employment of, or an attempt to use or
employ, in connection with a swap, or a contract of sale
of a commodity, in interstate commerce, or for future
delivery on or subject to the rules of any registered
entity, any manipulative device or contrivance in
contravention of such rules and regulations as the
Commission shall promulgate[.]
Id. CFTC Rule 180.1 prohibits:
85
Case 1:21-md-02989-CMA
Case 1:19-cv-09236-KPF
Document 429-1
Document 182
Entered on
FiledFLSD
09/28/21
Docket
Page 86
10/22/2021
of 127Page 87 of
128
any person ... in connection with any swap, or contract
of sale of any commodity in interstate commerce, or
contract for future delivery ... to intentionally or
recklessly ... [u]se or employ, or attempt to use or
employ, any manipulative device, scheme, or artifice to
defraud[.]
17 C.F.R. § 180.1(a)(1).
Although the CEA does not define the terms “manipulate device” or
“contrivance,” the CFTC has provided the following guidance with respect to
those terms:
The language of CEA section 6(c)(1), particularly the
operative phrase “manipulative or deceptive device or
contrivance,” is virtually identical to the terms used in
section 10(b) of the Securities Exchange Act of 1934 ....
Indeed, when the Commission promulgated Rule 180.1,
the Commission observed that given the similarities
between CEA section 6(c)(1) and Exchange Act section
10(b), the Commission deems it appropriate and in the
public interest to model final Rule 180.1 on SEC Rule
10b-5. Accordingly, case law developed under Section
10(b) of the Exchange Act and SEC Rule 10b-5 is
instructive in construing CEA Section 6(c)(1) and
Commission Regulation 180.1(a).
Platinum I, 2017 WL 1169626, at *34 (quoting In re Total Gas & Power N. Am.,
Inc., CFTC Dkt. No. 16-03, 2015 WL 8296610, at *8 (Dec. 7, 2015)). The case
law on the specific elements required to establish a manipulative device claim
is unsettled; however, the Court is persuaded by Judge Woods’s analysis in
Platinum I, id. at *36, and Judge Caproni’s analysis in In re Commodity
Exchange, 213 F. Supp. 3d at 672-73, both of which conclude that where — as
here — plaintiffs allege both “manipulation ... and misrepresentation ... as part
of a single scheme,” they may satisfy their pleading burden “by alleging with
86
Case 1:21-md-02989-CMA
Case 1:19-cv-09236-KPF
Document 429-1
Document 182
Entered on
FiledFLSD
09/28/21
Docket
Page 87
10/22/2021
of 127Page 88 of
128
particularity ‘the nature, purpose, and effect of the fraudulent conduct and the
roles of the defendants,’” and need not also plead loss causation or reliance at
the motion to dismiss stage. In re Commodity Exch., Inc., 213 F. Supp. 3d at
673 (quoting ATSI Comm’cns, 493 F.3d at 101); accord Platinum I, 2017 WL
1169626, at *36 (same); see also CFTC v. McDonnell, 332 F. Supp. 3d 641, 717
(E.D.N.Y. 2018) (“To prove a violation of [Rule] 180.1(a)[,] the Commission must
show that Defendants engaged in prohibited conduct (i.e., employed a
fraudulent scheme; made a material misrepresentation, misleading statement
or deceptive omission; or engaged in a business practice that operated as a
fraud); with scienter; and in connection with a contract of sale of a commodity
in interstate commerce.”).
Plaintiffs have alleged with particularity the various Defendants’ roles in
the manipulative scheme and have adequately pleaded scienter. For example,
Plaintiffs allege in detail how the DigFinex Defendants issued unbacked USDT,
transferred it to their accounts on the Exchange Defendants’ exchanges, and
used that unbacked USDT to artificially simulate organic demand and price
floors to inflate cryptocommodity prices. (CAC ¶¶ 135-136, 272-279, 295-300,
393-394). Plaintiffs allege that the Exchange Defendants were aware of this
scheme, and knowingly facilitated it by, inter alia, providing bespoke accounts
to the DigFinex Defendants, affirmatively misrepresenting the unbacked nature
of USDT, and concealing that USDT was not fully backed. (See id. at ¶¶ 310-
341). Plaintiffs allege that the CC Defendants were also aware of the scheme
and willingly participated by providing U.S. correspondent banking services to
87
Case 1:21-md-02989-CMA
Case 1:19-cv-09236-KPF
Document 429-1
Document 182
Entered on
FiledFLSD
09/28/21
Docket
Page 88
10/22/2021
of 127Page 89 of
128
help the DigFinex Defendants cover up the unbacked nature of USDT.
Plaintiffs further allege that the CC Defendants were explicitly told of their role
in keeping the price of Bitcoin artificially inflated. (See id. at ¶¶ 342-366). And
as noted above, Plaintiffs need not establish loss causation or reliance at this
time given Plaintiffs’ allegations of sustained market manipulation, see
Platinum I, 2017 WL 1169626, at *36 (collecting cases); accord In re Commodity
Exch., Inc., 213 F. Supp. 3d at 673 (same); for this reason, the Court rejects
Defendants’ arguments that Plaintiffs’ manipulative device claim must be
dismissed for failure to allege loss causation or reliance (see B/T Br. 21-22;
Exchange Br. 18-19; B/T Reply 12; Exchange Reply 8).
Defendants’ remaining arguments are equally unpersuasive. The
Exchange Defendants argue that their statements that USDT was not fully
backed were not false when made (see Exchange Br. 17-18; Exchange Reply 7
(citing CAC ¶¶ 166, 174)). But on the current record, the Court cannot
conclude that the statements were true when made, or that the Exchange
Defendants believed them to be true when made, especially when Plaintiffs
plausibly allege that the Exchange Defendants were involved in the
manipulative scheme from the get-go. Furthermore, Plaintiffs allege that the
Exchange Defendants made misrepresentations to the market other than the
explicit statement cited in the Exchange Defendants’ briefs, for example, by
covering up the unbacked nature of USDT throughout the course of the
manipulative scheme and by concealing the DigFinex Defendants’ manipulative
trading.
88
Case 1:21-md-02989-CMA
Case 1:19-cv-09236-KPF
Document 429-1
Document 182
Entered on
FiledFLSD
09/28/21
Docket
Page 89
10/22/2021
of 127Page 90 of
128
Finally, as Plaintiffs note, case law developed under Section 10(b) of the
Securities Exchange Act is instructive in construing the relevant portions of the
CEA and Rule 180.1, and the Second Circuit has instructed that Section 10(b)
“prohibits not only material misstatements but also manipulative acts,”
including “a transaction [that] sends a false pricing signal to the market,” as
Plaintiffs allege here. ATSI Commc’ns, 493 F.3d at 100; accord In re Commodity
Exch., Inc., 213 F. Supp. 3d at 673. As such, the Court denies the Moving
Defendants’ motions to dismiss Plaintiffs’ manipulative device claim.
iii. Secondary Liability
(a) Plaintiffs Adequately Allege a Principal-Agent
Liability Claim
Plaintiffs assert a claim for principal-agent liability pursuant to
Section 2(a)(1) of the CEA, 7 U.S.C. § 2(a)(1). “Under that provision, a claim for
principal-agent liability requires that [i] the agent was acting in the capacity of
an agent when he or she committed the unlawful acts and [ii] that the agent’s
actions were within the scope of his or her employment.” In re Silver, 213 F.
Supp. 3d at 571 (citations omitted); accord Platinum I, 2017 WL 1169626, at
*37 (same).
Plaintiffs have adequately pleaded principal-agent liability as to the
Individual Defendants and Fowler. First, Plaintiffs allege that the Individual
Defendants acted as agents of Bitfinex and Tether by serving as corporate
officers of those entities. (See CAC ¶¶ 23-24, 34-36, 476-480). Similarly,
Plaintiffs allege that Fowler acted as an agent and principal of Crypto Capital.
89
Case 1:21-md-02989-CMA
Case 1:19-cv-09236-KPF
Document 429-1
Document 182
Entered on
FiledFLSD
09/28/21
Docket
Page 90
10/22/2021
of 127Page 91 of
128
(Id. at ¶ 41). Plaintiffs also plead specific facts to support their allegations of
wrongdoing as to each of these defendants, as detailed supra with respect to
the Individual Defendants’ and Fowler’s motions to dismiss Plaintiffs’ Sherman
Act claims. (See id. at ¶¶ 130, 151-161, 343-347, 354-363). Second, Plaintiffs
adequately allege that the Individual Defendants and Fowler were acting within
the scope of their employment. (See id. at ¶¶ 23-24, 34-36, 476-480). The
Court therefore denies the Moving Defendants’ motions to dismiss Count Six. 40
(b) Plaintiffs Adequately Allege an Aiding and
Abetting Claim
Pursuant to Section 22 of the CEA, “[a]ny person ... who violates this
chapter or who willfully aids, abets, counsels, induces, or procures the
commission of a violation of this chapter shall be liable for actual damages
resulting from [relevant transactions] ... and caused by such violation” of the
statute. 7 U.S.C. § 25(a)(1). The Second Circuit has interpreted “aiding and
abetting” in this context as “requir[ing] the defendant to in some sort associate
himself with the venture, that he participate in it as in something that he
wishes to bring about, that he seek by his action to make it succeed.”
40 Plaintiffs’ opposition brief opposes only the Individual Defendants’ and Fowlers’ motions
to dismiss the CEA principal-agent liability claim. (Pl. Opp. 36-37). Accordingly, the
Court considers the motions to dismiss Count Six to be unopposed as to the other
Moving Defendants. Because Plaintiffs failed to plead that those other defendants were
acting as agents of Bitfinex, Tether, or other entities that allegedly manipulated
cryptocommodity prices, the Court grants the motion to dismiss this claim as to the
Exchange Defendants, the Tether Defendants, the Bitfinex Defendants, and DigFinex.
Plaintiffs also attempt to assert principal-agent liability claims against “other employees
of the corporate Defendants, as yet unknown to Plaintiffs[.]” (Pl. Opp. 37). Plaintiffs
failed to assert this claim against unnamed defendants in the Amended Complaint and
the Court rejects Plaintiffs’ attempt to assert such a claim in opposition to the Moving
Defendants’ motions to dismiss.
90
Case 1:21-md-02989-CMA
Case 1:19-cv-09236-KPF
Document 429-1
Document 182
Entered on
FiledFLSD
09/28/21
Docket
Page 91
10/22/2021
of 127Page 92 of
128
Amaranth III, 730 F.3d at 182 (internal quotation marks omitted) (quoting
United States v. Peoni, 100 F.2d 401, 402 (2d Cir. 1938)). “Consistent with the
Second Circuit’s holding, courts in this district have required plaintiffs alleging
aiding and abetting under the CEA to plead sufficient facts showing that ‘the
[d]efendant [i] had knowledge of the principal’s intent to violate the CEA;
[ii] intended to further that violation; and [iii] committed some act in
furtherance of the principal’s objective.’” Platinum I, 2017 WL 1169626, at *36
(quoting Laydon v. Mizuho Bank, Ltd. (“Laydon I”), No. 12 Civ. 3419 (GBD),
2014 WL 1280464, at *4 (S.D.N.Y. Mar. 28, 2014)).
The Amended Complaint adequately pleads all three elements. As
explained supra, Plaintiffs allege facts demonstrating that the DigFinex
Defendants, Exchange Defendants, and CC Defendants knowingly assisted
each other to perpetuate a manipulative scheme wherein they used unbacked
USDT to artificially inflate cryptocommodity prices. See Platinum I, 2017 WL
1169626, at *37 (collecting cases and denying motion to dismiss CEA aiding
and abetting claim where plaintiffs “plead[ed] sufficient facts showing that
Defendants knowingly assisted each other and participated in the Fixing with
the intent to artificially suppress ... prices”); In re Silver, 213 F. Supp. 3d at
571 (denying motion to dismiss CEA aiding and abetting claim where plaintiffs
adequately pleaded conspiracy to restrain trade and fix prices). Accordingly,
the Moving Defendants’ motions to dismiss Count Seven is denied.
91
Case 1:21-md-02989-CMA
Case 1:19-cv-09236-KPF
Document 429-1
Document 182
Entered on
FiledFLSD
09/28/21
Docket
Page 92
10/22/2021
of 127Page 93 of
128
iv. Plaintiffs Adequately Allege CEA Claims Against
the Individual Defendants and Fowler
Finally, the Court declines to dismiss the CEA claims brought against the
Individual Defendants and Fowler for essentially the same reasons the Court
sustained the Sherman Act claims against those same Defendants. Potter
argues that allegations against him are not specific enough to survive a motion
to dismiss. (Potter Br. 8-11; Potter Reply 5-8). The Court disagrees, for
substantially the same reasons the Court rejected this argument in the
antitrust context: allegations of Potter’s leadership role at Tether, Bitfinex, and
DigFinex, coupled with allegations regarding his willing involvement in covering
up USDT’s purportedly unbacked nature, sufficiently establish the requisite
conduct and intent to survive a motion to dismiss the CEA claims. Similarly,
the Court disagrees with Potter’s claim that Plaintiffs pleaded no act in
furtherance of price manipulation (Potter Br. 10-11); as but one example,
Plaintiffs pleaded that Potter worked to circumvent banking regulations, a key
component of perpetuating the false claim that USDT was fully backed, and
thus of the scheme to inflate cryptocommodity prices. Regarding Velde,
Devasini, and Fowler, the Court has already explained why Plaintiffs’
allegations implicating the Individual Defendants are not fatally vague,
inasmuch as Plaintiffs allege specific facts as to each and also generally allege
misdeeds carried out while the Individual Defendants were acting as agents of
Bitfinex, Tether, or Digfinex. Accordingly, the Court declines to dismiss CEA
claims against the Individual Defendants and Fowler.
92
Case 1:21-md-02989-CMA
Case 1:19-cv-09236-KPF
Document 429-1
Document 182
Entered on
FiledFLSD
09/28/21
Docket
Page 93
10/22/2021
of 127Page 94 of
128
c. Plaintiffs’ RICO Claims Are Dismissed
The Court proceeds to consider Plaintiffs’ civil RICO claims. By way of
background, Congress enacted RICO in 1970 to “eradicat[e] ... organized crime
in the United States.” Am. Fed’n of State, Cnty. & Mun. Emp. Dist. Council 37
Health & Sec. Plan v. Bristol-Myers Squibb Co., 948 F. Supp. 2d 338, 344
(S.D.N.Y. 2013) (citing Pub. L. No. 91-452 (1970)). Under RICO, organized
crime is defined as racketeering activity, a term that “encompass[es] dozens of
state and federal statutes” that serve as punishable predicate acts. RJR
Nabisco, Inc. v. European Cmty., 136 S. Ct. 2090, 2096 (2016). An individual
who commits two or more predicate acts within a ten-year period may violate
RICO if “those predicate offenses are related to one another ... and the
predicates amount to or pose a threat of continued criminal activity.” Elsevier,
Inc. v. Grossmann, No. 12 Civ. 5121 (KPF), 2017 WL 1843298, at *3 (S.D.N.Y.
May 8, 2017) (internal quotation marks omitted) (citing H.J. Inc. v. Nw. Bell Tel.
Co., 492 U.S. 229, 239 (1989)).
RICO establishes four criminal offenses, and, separately, a private civil
cause of action. RJR Nabisco, 136 S. Ct. at 2096-97. Sections 1962(a)-(d)
make it unlawful to engage in several specific activities involving a “pattern of
racketeering activity.” Specifically:
Section 1962(a) makes it unlawful to invest income
derived from a pattern of racketeering activity in an
enterprise. Section 1962(b) makes it unlawful to
acquire or maintain an interest in an enterprise through
a pattern of racketeering activity. Section 1962(c)
makes it unlawful for a person employed by or
associated with an enterprise to conduct the
93
Case 1:21-md-02989-CMA
Case 1:19-cv-09236-KPF
Document 429-1
Document 182
Entered on
FiledFLSD
09/28/21
Docket
Page 94
10/22/2021
of 127Page 95 of
128
enterprise’s affairs through a pattern of racketeering
activity. Finally, [Section] 1962(d) makes it unlawful to
conspire to violate any of the other three prohibitions.
Id. at 2097.
Of significance here, RICO affords a private right of action to individuals
who are harmed by racketeering activity. See 18 U.S.C. § 1964. This private
right of action allows a plaintiff to bring a claim under RICO for sustaining
injuries “in his business or property by reason of a violation of [S]ection 1962.”
Id. § 1964(c). A plaintiff who proves injuries in his business or property may
“recover threefold the damages he sustains and the cost of the suit, including a
reasonable attorney’s fee[.]” Id. Here, Plaintiffs assert three RICO claims:
• pursuant to Section 1962(c) against the DigFinex
and CC Defendants;
• pursuant to Section 1962(a) against the DigFinex
Defendants — pleaded in the alternative to
Plaintiffs’ Section 1962(c) claim; and
• pursuant to Section 1962(d) against all Defendants
for a RICO conspiracy to violate Section 1962(a)
and (c).
(See CAC ¶¶ 449-572). For the reasons that follow, Plaintiffs’ RICO claims are
dismissed in their entirety.
i. Plaintiffs’ Section 1962(c) Claim Is Dismissed
In Count Eight, Plaintiffs allege that certain Defendants conducted the
affairs of an enterprise through a pattern of racketeering activity, in violation of
18 U.S.C. § 1962(c). In particular, Plaintiffs allege that “DigFinex Inc., iFinex
Inc., BFXNA Inc., BFXWW Inc., Tether Holdings Limited, Tether Limited, Tether
Operations Limited, Tether International Limited, Poloniex, Inc., Bittrex, Inc.,
94
Case 1:21-md-02989-CMA
Case 1:19-cv-09236-KPF
Document 429-1
Document 182
Entered on
FiledFLSD
09/28/21
Docket
Page 95
10/22/2021
of 127Page 96 of
128
Ludovicus Jan van der Velde, Giancarlo Devasini, [and] Philip G. Potter … have
been associated-in-fact and have constituted a RICO enterprise since at least
2015,” and, further, that “Crypto Capital and Fowler were part of the enterprise
from at least 2016 to October 2019.” (CAC ¶¶ 453-454 (identifying the putative
members of the RICO “Count Eight Enterprise”)). The Count Eight Enterprise
is alleged to have conducted its affairs through a pattern of racketeering
activity that included wire fraud, bank fraud, money laundering, engaging in
monetary transactions in criminally derived property, and operating an
unlicensed money transmitting business. (Id. at ¶¶ 483-535). Its purpose,
according to Plaintiffs,
was to manipulate the price of cryptocommodities by
engaging in a scheme to defraud the market. The
Enterprise used a purported stablecoin, USDT, which
the Tether, Bitfinex, and Individual Defendants
fraudulently represented was backed 1:1 by U.S. dollar
reserves. These misrepresentations allowed these
Defendants to issue new, unbacked USDT and use that
debased USDT to artificially inflate the prices of
cryptocommodities through transactions on the Bittrex
and Poloniex exchanges.
(Id. at ¶ 456). Finally, Plaintiffs claim injury as a consequence of the Count
Eight Enterprise’s racketeering acts, insofar as Plaintiffs “purchas[ed]
cryptocommodities at artificially inflated prices they would not have paid but
for the Count Eight Defendants’ scheme.” (Id. at ¶ 457).
In resolving the Moving Defendants’ challenge to Plaintiffs’ Section
1962(c) claim, the Court focuses on the issues of standing and causation.
Pursuant to Second Circuit precedent, among other things, “[t]o demonstrate
95
Case 1:21-md-02989-CMA
Case 1:19-cv-09236-KPF
Document 429-1
Document 182
Entered on
FiledFLSD
09/28/21
Docket
Page 96
10/22/2021
of 127Page 97 of
128
RICO standing, a plaintiff must plead, at a minimum ... causation of the injury
by the defendant’s violation.” Baisch v. Gallina, 346 F.3d 366, 373 (2d Cir.
2003), abrogated on other grounds by Lexmark Int’l, Inc. v. Static Control
Components, Inc., 572 U.S. 118 (2014). Under RICO, causation requires both
“but for” and proximate causation. See Holmes v. Secs. Inv. Protection Corp.,
503 U.S. 258, 259, 266 (1992).
To establish proximate causation, the connection between the
defendant’s conduct and the plaintiff’s injury must be “direct” and
“straightforward,” Holmes, 503 U.S. at 268; see also Hemi Grp., LLC v. City of
New York, 559 U.S. 1, 14 (2010), and must not entail “intricate, uncertain
inquiries” into the extent of the defendant’s responsibility for the loss, Anza v.
Ideal Steel Supply Corp., 547 U.S. 451, 460 (2006); accord Empire Merchants,
LLC v. Reliable Churchill LLLP, 902 F.3d 132, 142 (2d Cir. 2018). A link that is
“too remote, purely contingent, or indirect” is insufficient, Hemi Group, 559
U.S. at 9-10, and even at the pleading stage, a court should rarely “go beyond
the first step” in assessing causation, Holmes, 503 U.S. at 272. The
requirement of a direct causal relation serves vital considerations of judicial
administrability and convenience:
First, “the less direct an injury is, the more difficult it
becomes to ascertain the amount of a plaintiff’s
damages attributable to the violation, as distinct from
other, independent, factors.” Second, recognizing the
claims of the indirectly injured would lead to problems
of apportionment, as courts would have to adopt
complicated rules to prevent multiple recoveries. Third,
“directly injured victims can generally be counted on to
vindicate the law as private attorneys general, without
96
Case 1:21-md-02989-CMA
Case 1:19-cv-09236-KPF
Document 429-1
Document 182
Entered on
FiledFLSD
09/28/21
Docket
Page 97
10/22/2021
of 127Page 98 of
128
any of the problems attendant upon suits by plaintiffs
injured more remotely.”
Doe v. Trump Corp., 385 F. Supp. 3d 265, 276 (S.D.N.Y. 2019) (internal
citations omitted) (quoting Holmes, 503 U.S. at 268-70).
The Court pauses briefly to note that all of the predicate racketeering
acts alleged here — wire fraud, money laundering, bank fraud, unlawful money
transactions, and operation of unlicensed money transmitting businesses —
arise out of essentially the same related conduct: covering up the unbacked
nature of USDT by circumventing U.S. banking regulations (bank fraud and
operation of unlicensed money transmitting businesses), and then using that
unbacked USDT to purchase cryptocommodities (money laundering, wire
fraud, and unlawful money transactions). (See CAC ¶¶ 484-535). 41 The
Moving Defendants argue that any alleged loss incurred by Plaintiffs is too
attenuated from Defendants’ purported racketeering activity to establish
proximate cause under RICO. Specifically, they argue that the intervening
activity of third parties — those users who exchanged cryptocommodities for
the allegedly unbacked USDT — breaks the causal chain. (See B/T Br. 24-27;
Exchange Br. 24-25; Potter Br. 11; Fowler Br. 18-21; B/T Reply 13-16).
Plaintiffs offer two counterarguments in opposition: first, that Defendants’ use
of unbacked USDT to prop up cryptocommodity prices by establishing
fraudulent price floors is not too remote, even if Defendants did not interact
41 Because the Court ultimately concludes that Plaintiffs lack standing to pursue their
Section 1962(c) claim, the Court does not here analyze whether Plaintiffs have
adequately pleaded predicate RICO offenses.
97
Case 1:21-md-02989-CMA
Case 1:19-cv-09236-KPF
Document 429-1
Document 182
Entered on
FiledFLSD
09/28/21
Docket
Page 98
10/22/2021
of 127Page 99 of
128
directly with Plaintiffs in issuing the unbacked USDT (Pl. Opp. 43-47); and
second, that the subsequent price inflation was a “foreseeable and natural
consequence” of the scheme irrespective of the involvement of third parties (id.
at 47-50).
The Court agrees with the Moving Defendants that Plaintiffs’ allegations
require the intervening activity of third parties, that those third parties are
better situated than Plaintiffs to allege RICO claims given the racketeering
activity alleged here, and that the connection between the racketeering activity
and the harm “is attenuated by substantial intervening factors or third party
conduct.” Doe, 385 F. Supp. 3d at 276. In so doing, it rejects Plaintiffs’
arguments to the contrary. As an initial matter, Plaintiffs claim that “[c]ourts
in this circuit recognize that plaintiffs who trade in a manipulated market can
establish RICO injury and causation.” (Pl. Opp. 44). However, the lone case
Plaintiffs cite to support this proposition, Sonterra Capital Master Fund Ltd. v.
UBS AG, 954 F.3d 529 (2d Cir. 2020), addresses injury only in the context of
Article III standing, and says nothing about RICO’s more stringent proximate
cause requirement, see id. at 534-35.
This Court has independently identified other cases addressing
proximate cause in the context of RICO market manipulation claims, but those
cases are distinguishable. For example, in Dennis v. JPMorgan Chase & Co.,
343 F. Supp. 3d 122, 184 (S.D.N.Y. 2018), adhered to on denial of
reconsideration, No. 16 Civ. 6496 (LAK), 2018 WL 6985207 (S.D.N.Y. Dec. 20,
2018), and Sonterra I, 277 F. Supp. 3d at 576, two sister courts in this District
98
Case 1:21-md-02989-CMA
Case 1:19-cv-09236-KPF
Document 429-1
Document
Entered
182 onFiled
FLSD
09/28/21
DocketPage 99
10/22/2021
of 27Page 100 of
128
found proximate cause adequately alleged in the context of market
manipulation claims as to certain groups of plaintiffs. However, in both of
those cases, a direct connection existed between the defendants’ manipulation
of interest rates and the injury suffered by the plaintiff-investors who
purchased derivatives that incorporated the inflated rates.
For example, the plaintiffs in Dennis and Sonterra I did not rely on
allegations that independent market participants responded to artificial market
signals; instead, those cases involved situations where the purported rate
manipulation directly and necessarily influenced the price of the derivatives
purchased by the plaintiffs (i.e., because the manipulated rates were
fundamental components of pricing the derivatives). See Dennis, 343 F. Supp.
3d at 145-47 (explaining the direct link between the Bank Bill Swap Reference
Rate (“BBSW”), a benchmark interest rate, and BBSW derivatives purchased by
plaintiffs); Sonterra I, 277 F. Supp. 3d at 537-42 (same, but as to LIBOR
instead of BBSW). Here, by contrast, there are intervening steps between the
racketeering activity (i.e., covering up the unbacked nature of USDT and the
use of that USDT to buy cryptocommodities) and Plaintiffs’ injury, which was
caused by the creation of artificial price floors and price inflation. In
particular, the market — and independent buyers and sellers in the market —
responded to the stimulus of the unbacked USDT that the DigFinex Defendants
repeatedly injected into the cryptocommodity market. 42
42 The Court identified only one case from within this Circuit where the court found
proximate cause adequately alleged in the context of market manipulation without an
explicit finding that the fraudulently manipulated element was directly connected to the
99
Case 1:21-md-02989-CMA
Case 1:19-cv-09236-KPF
Document 429-1
Document 182
Entered on
FiledFLSD
09/28/21
Docket
Page 100
10/22/2021
of 127
Page 101 of
128
Plaintiffs allege that Defendants’ use of unbacked USDT simulated
organic demand, thus creating artificial price floors, and argue that this act
“did not depend on the actions of later investors.” (Pl. Opp. 44). But the
establishment of a price floor is not a unilateral action and necessarily requires
the independent action of other market participants, which participants may
choose to buy or not buy cryptocommodities for any number of reasons. The
involvement of independent market actors in that intermediate step introduces
the possibility that factors other than Defendants’ racketeering activity gave
rise to the artificial price inflation that injured Plaintiffs. And unlike in the
LIBOR and BBSW cases, there is no direct connection between the racketeering
activity and the injury to keep the causal chain intact despite the involvement
of independent market actors.
The Court therefore agrees with Defendants that the facts alleged here
are closer to those alleged in 7 West 57th Street Realty Company, LLC v.
asset price. See In re Sumitomo Copper Litig., 104 F. Supp. 2d 314, 321 (S.D.N.Y. 2000).
In Sumitomo, the court found proximate cause adequately pleaded where defendants
purportedly engaged in mail and wire fraud to overstate market transactions in copper
and copper futures, causing the price of copper and copper futures to artificially
increase. Id. at 320-21. Those allegations are much more direct than the relationship
between the racketeering activity and injury alleged here. In Sumitomo, the
racketeering activity alleged created the very misrepresentations that caused the price
of copper to increase, even if that artificial increase necessarily required market
participants to respond to the misrepresented transactions. An apt analogy to this case
would be if Plaintiffs had alleged that Defendants’ racketeering activity was not to
misrepresent USDT’s one-to-one backing, but instead to fraudulently claim to have
purchased more bitcoin than they actually purchased, creating the illusion of artificial
demand in a single step, rather than employing the multi-step process of laundering
unbacked USDT outlined in the Amended Complaint to simulate organic demand.
Furthermore, the Court notes that Sumitomo was decided before the Supreme Court’s
more recent decisions addressing proximate cause in Anza v. Ideal Steel Supply Corp.,
547 U.S. 451 (2006), and Hemi Grp., LLC v. City of New York, 559 U.S. 1 (2010).
100
Case 1:21-md-02989-CMA
Case 1:19-cv-09236-KPF
Document 429-1
Document 182
Entered on
FiledFLSD
09/28/21
Docket
Page 101
10/22/2021
of 127
Page 102 of
128
Citigroup, Inc., 771 F. App’x 498 (2d Cir. 2019) (summary order). (See B/T
Reply 13-14). In 7 West 57th, the Second Circuit declined to find proximate
causation where the plaintiff alleged that the defendants manipulated LIBOR,
and claimed injury because the manipulation of LIBOR purportedly caused a
change in the value of bonds not directly pegged to LIBOR. 771 F. App’x at
500-01, 503-04. The Second Circuit explained that the alleged racketeering
activity did not proximately cause the plaintiff’s injury because “the injury was
directly caused by buy/sell decisions that independent market actors made,
which LIBOR may have influenced.” Id. at 504. Here too, the manipulation of
cryptocommodity prices “was directly caused by buy/sell decisions that
independent market actors made,” and it is these actions that established price
floors and created a bubble, “which [the purchase of cryptocommodities using
unbacked USDT] may have influenced.” Id.; accord Laydon v. Mizuho Bank,
Ltd. (“Laydon II”), No. 12 Civ. 3419 (GBD), 2015 WL 1515487, at *10 (S.D.N.Y.
Mar. 31, 2015) (finding no proximate cause where multiple discrete links
between defendants’ racketeering conduct in fixing two rate benchmarks and
injury caused by price manipulation of derivatives in which plaintiffs traded).
Thus, the relationship between the use of unbacked USDT to purchase
cryptocommodities and the manipulation of prices in the cryptocommodity
market is more like allegations of price manipulation where the derivative at
issue is responsive to independent market forces and not pegged to an interest
rate (like LIBOR), than to the allegations in Dennis and Sonterra I, where the
assets were directly pegged to the manipulated rates.
101
Case 1:21-md-02989-CMA
Case 1:19-cv-09236-KPF
Document 429-1
Document 182
Entered on
FiledFLSD
09/28/21
Docket
Page 102
10/22/2021
of 127
Page 103 of
128
Additionally, this is not a scenario where the plaintiffs are those directly
injured by the racketeering conduct; rather, that injury fell on those market
participants who exchanged cryptocommodities for the unbacked USDT. Those
individuals may have a stronger claim to RICO standing because the causal
link between the racketeering activity and the injury is direct and does not
require market participants to play along.
This Court’s examination of recent Supreme Court and Second Circuit
decisions addressing proximate cause reinforces its determination that
proximate cause is lacking here. For example, in Holmes, the Supreme Court
declined to find proximate causation when the plaintiffs, entities that covered
the losses of two broker-dealers that failed after the defendants allegedly
conspired to manipulate stock prices that the brokers purchased, claimed
injury on behalf of customers who did not directly purchase the manipulated
stock. See 503 U.S. at 261-63, 268. The chain was too attenuated because
the plaintiffs could have been injured by wholly independent factors, such as
the broker-dealers’ “poor business practices or their failures to anticipate
developments in the financial markets.” Id. at 273. The Court explained that
the broker-dealers themselves, as direct customers, would have standing under
RICO. Id. at 274-75. Here, Plaintiffs attempt to analogize themselves to the
defunct broker-dealers who purchased the manipulated stocks, which broker-
dealers would have standing under Holmes. (Pl. Opp. 48-49). However, the
defunct broker-dealers are more properly analogized to individuals who
exchanged cryptocommodities for the unbacked USDT, as those individuals
102
Case 1:21-md-02989-CMA
Case 1:19-cv-09236-KPF
Document 429-1
Document 182
Entered on
FiledFLSD
09/28/21
Docket
Page 103
10/22/2021
of 127
Page 104 of
128
were the ones who were directly harmed by Defendants’ alleged
misrepresentations.
In Anza, the plaintiff, a steel supply company, alleged that its principal
competitor had evaded taxes, allowing it to undercut the plaintiff’s prices and
cost the plaintiff sales. Anza, 547 U.S. at 454. The Supreme Court held that
the plaintiff had not adequately pleaded proximate cause because its “lost sales
could have resulted from factors other than [the defendants’] alleged acts of
fraud,” and noted in particular that “[b]usinesses lose and gain customers for
many reasons, and it would require a complex assessment to establish what
portion of [the plaintiff’s] lost sales were the product of” the defendant’s
conduct. Id. at 459. As in Anza, determining how much of the artificial price
floors and price inflation is attributable to Defendants’ racketeering activity
(covering up the unbacked nature of USDT and using that USDT to purchase
cryptocommodities), would require a similarly “complex assessment.” Id. But
such a complex assessment would be unnecessary for another group more
directly injured by the racketeering activity, i.e., individuals who exchanged
cryptocommodities for unbacked USDT. 43
43 Plaintiffs attempt to distinguish Anza by arguing that Defendants’ manipulation of
cryptocommodity prices “was not a mere byproduct of Defendants’ scheme; it was the
object of the scheme” (Pl. Opp. 47), whereas in Anza, the defendants’ predicate act was
tax fraud, which could only harm the state, and not the plaintiffs (id. (citing Anza, 547
U.S. at 457-58)). Plaintiffs’ argument is unavailing. The predicate acts alleged here all
arise out of Defendants’ issuance and use of unbacked USDT to purchase
cryptocommodities. Plaintiffs do not allege that they accepted the unbacked USDT in
exchange for cryptocommodities. Rather, the harm alleged is the product of artificial
prices in the cryptocommodity market, which harm requires independent market actors
to create price floors or price bubbles.
103
Case 1:21-md-02989-CMA
Case 1:19-cv-09236-KPF
Document 429-1
Document 182
Entered on
FiledFLSD
09/28/21
Docket
Page 104
10/22/2021
of 127
Page 105 of
128
In Hemi Group, a plurality of the Supreme Court held that New York City
had not stated a RICO claim against a business that had failed to provide
statutorily required disclosures about its customers to the New York State
government, making it difficult for the city to pursue tax evaders. See Hemi
Group, 559 U.S. at 5-7. The court concluded that proximate cause had not
been sufficiently pleaded: “[T]he conduct directly causing the [city’s] harm was
distinct from the conduct giving rise to the fraud,” because of the various
intervening factors attenuating the link between the business’s failure to
disclose and the city’s lost tax revenue. Id. at 2, 11. Here as well, Plaintiffs’
alleged injury is too attenuated, as various intervening factors may have
caused independent market actors to buy cryptocommodities, including, as the
B/T Defendants note, “speculation; introduction of other cryptocurrencies;
distrust of centralized, government-controlled money supply; initial coin
offerings; increasing media attention; and bullish market reports.” (B/T
Br. 26).
Plaintiffs counter that the Supreme Court’s decision in Bridge v. Phoenix
Bond & Indemnity Co., 553 U.S. 639 (2008) — a case where the plaintiffs were
found to have adequately pleaded proximate causation, despite allegations that
the defendants targeted a third-party with racketeering conduct — supports a
finding of proximate cause here. (Pl. Opp. 46-47). In point of fact, the Court
finds that Bridge provides an instructive contrast with the allegations in the
Amended Complaint. In Bridge, the plaintiffs were unsuccessful participants
in county tax lien auctions, and they alleged that the defendants had won a
104
Case 1:21-md-02989-CMA
Case 1:19-cv-09236-KPF
Document 429-1
Document 182
Entered on
FiledFLSD
09/28/21
Docket
Page 105
10/22/2021
of 127
Page 106 of
128
disproportionate share of auctions by fraudulently manipulating the county’s
process of selecting auction winners in the event of a tie. See Bridge, 553 U.S.
at 642-44. The defendants argued that proximate cause had not been
established because the county, not plaintiffs, relied on the defendants’
misrepresentations. See id. at 653-55. In rejecting this argument, the
Supreme Court explained that “here, unlike in Holmes and Anza, [i] there are
no independent factors that account for respondents’ injury, [ii] there is no risk
of duplicative recoveries by plaintiffs removed at different levels of injury from
the violation, and [iii] no more immediate victim is better situated to sue.” Id.
at 658. 44 In the instant case, by contrast, (i) there are independent factors that
may account for the injury, as just noted (see B/T Br. 26); (ii) there are more
immediate victims; and (iii) there is a risk of duplicative recovery, because at
the very least, individuals who received debased USDT for cryptocommodities
could pursue a RICO claim. 45
44 In other words, as the Supreme Court explained in Hemi Group, “the plaintiff’s theory of
causation in Bridge was ‘straightforward’: Because of the zero-sum nature of the
auction, and because [of the county’s procedure for awarding bids], each time a fraud-
induced bid was awarded, a particular legitimate bidder was necessarily passed over.”
Hemi Group, 559 U.S. at 14.
Plaintiffs’ attempt to shoehorn the facts alleged here to align with those alleged in
Bridge is unpersuasive. Plaintiffs argue that “here, for every injection of USDT onto the
market, subsequent purchasers of crypto-commodities — including Plaintiffs — lost
money,” just as, in Bridge (as described in Hemi Group) “for every bid the Bridge
defendants won through their fraud, another bidder necessarily lost out.” (Pl. Opp. 46
(citing Hemi Group, 559 U.S. at 14-15)). The Court fails to see how a zero-sum bidding
system, where one bidder winning necessarily causes other bidders to lose, is analogous
to an open market, wherein myriad factors may influence the price of
cryptocommodities, such that Defendants’ injection of USDT into the market does not
necessarily cause prices to increase.
45 For essentially the same reasons, Plaintiffs’ citations to D’Addario v. D’Addario, 901
F.3d 80 (2d Cir. 2018), and De Sole v. Knoedler Gallery, LLC, 974 F. Supp. 2d 274, 310
n.15 (S.D.N.Y. 2013), fail to carry the day. (See Pl. Opp. 46-47). Both cases stand only
105
Case 1:21-md-02989-CMA
Case 1:19-cv-09236-KPF
Document 429-1
Document 182
Entered on
FiledFLSD
09/28/21
Docket
Page 106
10/22/2021
of 127
Page 107 of
128
Finally, in Empire Merchants, a distributor with exclusive rights to
distribute certain brands of liquor in New York sued competing distributors for
illegally smuggling liquor into the state. See Empire Merchants, 902 F.3d at
136. The plaintiff argued that because the smuggled liquor was not subject to
New York’s excise taxes, it could be sold at a lower price, which in turn
decreased the plaintiff’s sales. See id. at 137. The Second Circuit held that the
complaint did not sufficiently plead proximate cause because the retailers’
choices not to purchase liquor from the plaintiff did not necessarily follow from
the defendants’ smuggling activities. Id. at 146-47. The Empire Merchants
court explained that the plaintiff “might have lost sales due to bootlegging from
states with even lower alcohol excise taxes ... [o]r various retailers might have
purchased wine, beer, or a brand of liquor not subject to Empire’s exclusive
distribution contracts to offer something new to consumers or to respond to
changes in consumer tastes.” Id. at 143. The Empire Merchants court rejected
a similar attempt to analogize the facts in that case to those in Bridge:
Empire asserts that its proximate cause theory is
straightforward and like that in Bridge: it alleges that
every crate of every Empire-exclusive brand smuggled
into New York cost it a sale. We disagree. As in Anza
and Hemi, and unlike Bridge, Empire has not and
cannot allege that the asserted racketeering activity
for the proposition that a plaintiff may pursue a RICO claim even when the defendant’s
misrepresentation targeted a third party, as long as the causal link between the
misrepresentation and the injury alleged is direct. Here, as noted above, the link is not
sufficiently direct, because Plaintiffs’ allegations necessarily require the involvement of
independent market actors, exposed to other market forces, to establish the price floors
and inflated prices that purportedly injured Plaintiffs. Cf. Doe v. Trump Corp., 385 F.
Supp. 3d 265, 678 (S.D.N.Y. 2019) (“If a purported intervening factor does not make
any less certain the quantum of loss attributable to the defendant or create problems of
apportionment, it cannot be said to attenuate the causal link.”).
106
Case 1:21-md-02989-CMA
Case 1:19-cv-09236-KPF
Document 429-1
Document 182
Entered on
FiledFLSD
09/28/21
Docket
Page 107
10/22/2021
of 127
Page 108 of
128
directly caused its injury. This is so for three principal
reasons: [i] Empire was harmed by the New York
retailers’ decisions to purchase less alcohol from
Empire, which is not itself racketeering activity; [ii] the
asserted causal relationship between the alleged
racketeering and retailers’ decisions to purchase less
alcohol from Empire is intricate and uncertain, as in
Anza and Hemi, and not Bridge; and [iii] New York State
is a better situated plaintiff that was more directly
harmed by the defendants’ alleged racketeering.
Id. at 142.
So too here. First, Plaintiffs were harmed by the decisions of
independent market participants to purchase cryptocommodities (thereby
artificially inflating prices), which conduct is not itself racketeering activity.
Second, the relationship between Defendants’ alleged racketeering activity —
covering up the unbacked nature of USDT and using unbacked USDT to
purchase cryptocommodities — and the establishment of price floors and the
simulation of organic demand (which purportedly caused Plaintiffs’ injury), is
intricate, uncertain, and contingent on numerous independent decisions made
by other market participants, subject to other market forces. Third, market
participants who directly exchanged cryptocommodities for unbacked USDT
are better situated plaintiffs, as they were more directly harmed by Defendants’
alleged racketeering conduct.
For the foregoing reasons, the causal connection between Defendants’
purported racketeering and Plaintiffs’ injury is insufficiently “direct” and
“straightforward” to satisfy the proximate cause requirement under Section
107
Case 1:21-md-02989-CMA
Case 1:19-cv-09236-KPF
Document 429-1
Document 182
Entered on
FiledFLSD
09/28/21
Docket
Page 108
10/22/2021
of 127
Page 109 of
128
1962(c). Holmes, 503 U.S. at 268. Accordingly, the Court dismisses Plaintiffs’
Section 1962(c) RICO claim. 46
ii. Plaintiffs’ Section 1962(a) Claim Is Dismissed
Plaintiffs fare no better with Count Nine, their Section 1962(a)
“investment of racketeering proceeds” claim. Given the nearly twenty-eight
pages over which Plaintiffs detail their Section 1962(c) claim, the three pages
they devote to their Section 1962(a) claim makes it seem like an afterthought —
and indeed, the claim is specifically pleaded in the alternative. (See CAC
¶¶ 549-560). Like the Section 1962(c) claim, the Section 1962(a) claim is
brought against all of the DigFinex Defendants; unlike the Section 1962(c)
claim, the Section 1962(a) claim is not also brought against the CC
Defendants.
As support for the Section 1962(a) claim, Plaintiffs allege that the
DigFinex Defendants engaged in a pattern of racketeering activity that included
wire fraud, engaging in transactions involving criminally derived property, and
operating an unlicensed money transmitting business. (CAC ¶ 553). From this
conduct, the DigFinex Defendants realized both income and proceeds of
46 Plaintiffs argue that proximate cause may nevertheless be established if the injury is “‘a
foreseeable and natural consequence of [Defendants’] scheme,’ for which Defendants
are liable.” (Pl. Opp. 47 (quoting Bridge v. Phoenix Bond & Indem. Co., 553 U.S. 639,
658 (2008)); see also id. at 46-50). Plaintiffs misapprehend the relationship between
proximate cause under RICO and at common law. See, e.g., Hemi Group, 559 U.S. at
12 (stating that the Supreme Court in “Holmes never even mention[ed] the concept of
foreseeability”); Lerner v. Fleet Bank, N.A., 459 F.3d 273, 278 (2d Cir. 2006) (“A plaintiff
must make a different showing of proximate cause — one that is often more difficult to
make — when bringing suit under the RICO statute than when bringing a common-law
cause of action.”). Regardless of foreseeability, Plaintiffs must first establish that
proximate causation is “direct,” Holmes, 503 U.S. at 271, and as discussed above,
Plaintiffs have failed to do so.
108
Case 1:21-md-02989-CMA
Case 1:19-cv-09236-KPF
Document 429-1
Document 182
Entered on
FiledFLSD
09/28/21
Docket
Page 109
10/22/2021
of 127
Page 110 of
128
income, the former as a result of purchases of USDT by legitimate customers
and the latter in the form of debased USDT. (Id. at ¶ 554). According to
Plaintiffs, “Defendants then used their self-issued, debased USDT in the
operation of an association-in-fact enterprise, whose purpose was to artificially
inflate cryptocommodity prices and profit therefrom. That enterprise consisted
of the Tether Defendants, the Bitfinex Defendants, the Individual Defendants,
Poloniex, and Bittrex (the ‘Count Nine Enterprise’).” (Id. at ¶ 555). 47 In other
words, most of the dramatis personae who are alleged to have constituted the
vehicle through which a pattern of racketeering activity was conducted in
Count Eight are, with nearly identical allegations of conduct, also alleged to
constitute the entity into which racketeering proceeds were invested in Count
Nine. Plaintiffs claim injuries as a result of purchasing cryptocommodities at
artificially inflated prices. (Id. at ¶ 558).
The B/T Defendants take the laboring oar in moving for dismissal of
Plaintiffs’ Section 1962(a) claim, arguing in relevant part that: (i) Plaintiffs fail
to demonstrate “direct causation” in the Section 1962(a) context for the same
reasons as in the Section 1962(c) context (see B/T Br. 27 n.17; B/T Reply 16);
(ii) debased USDT are not “proceeds” derived from racketeering activity within
47 See also CAC ¶ 556:
The Count Nine Defendants invested debased USDT in
cryptocommodities through transfers of debased USDT from Tether
to the Bitfinex crypto-exchange, and then to the Bittrex and
Poloniex crypto-exchanges, where the debased USDT was sold for
cryptocommodities. This use of debased USDT in the operation of
the Count Nine Enterprise directly caused cryptocommodity prices
to increase.
109
Case 1:21-md-02989-CMA
Case 1:19-cv-09236-KPF
Document 429-1
Document 182
Entered on
FiledFLSD
09/28/21
Docket
Page 110
10/22/2021
of 127
Page 111 of
128
the meaning of Section 1962(a) (see B/T Reply 17); and (iii) Plaintiffs fail to
allege a separate enterprise into which the racketeering proceeds were invested
(see id. at 17-18). As discussed in the remainder of this section, certain of the
B/T Defendants’ arguments have more traction than others, but the Court
ultimately dismisses Plaintiffs’ Section 1962(a) claim because of pleading
deficiencies regarding the alleged enterprise, the investment of funds, and the
claimed injury.
Section 1962(a) provides that:
[i]t shall be unlawful for any person who has received
any income derived ... from a pattern of racketeering
activity ... in which such person has participated as a
principal ..., to use or invest ... any part of such income,
or the proceeds of such income, in acquisition of any
interest in, or the establishment or operation of, any
enterprise which is engaged in, or the activities of which
affect, interstate or foreign commerce.
18 U.S.C. § 1962(a). Particularly when compared with the robust caselaw
regarding Section 1962(c), there are fewer cases addressing the requirements of
a claim under Section 1962(a). A sister court in this District has explained
that “[t]o state a claim under [Section] 1962(a), a plaintiff must allege ‘[i] that
the defendants used or invested racketeering income to acquire or maintain an
interest in the alleged enterprise; and [ii] that the plaintiffs suffered injury as a
result of that investment by the defendants.” 4 K & D Corp. v. Concierge
Auctions, LLC, 2 F. Supp. 3d 525, 543 (S.D.N.Y. 2014) (quoting R.C.M. Exec.
Gallery Corp. v. Rols Cap. Co., 901 F. Supp. 630, 642 (S.D.N.Y. 1995)). Another
frequently cited decision from the Eastern District of New York teaches that:
110
Case 1:21-md-02989-CMA
Case 1:19-cv-09236-KPF
Document 429-1
Document 182
Entered on
FiledFLSD
09/28/21
Docket
Page 111
10/22/2021
of 127
Page 112 of
128
in order to state a cause of action for a violation of
[Section] 1962(a), a plaintiff must allege [i] that a
defendant received income from a pattern of
racketeering activity; [ii] invested that income in the
acquisition of a stake in, or establishment of, an
enterprise distinct from the one from which the income
was derived; and [iii] that the plaintiff suffered an injury
flowing from this reinvestment of racketeering income
distinct from any injury suffered because of the
commission of the original predicate acts of
racketeering activity.
Leung v. Law, 387 F. Supp. 2d 105, 120 (E.D.N.Y. 2005).
The Leung court’s articulation of a Section 1962(a) claim is echoed in the
B/T Defendants’ argument that Plaintiffs have failed to allege a separate
enterprise into which the proceeds of the racketeering activity were deposited.
(See B/T Reply 17-18). The Court accordingly begins its analysis of Plaintiffs’
Section 1962(a) claim by considering the statute’s enterprise requirement.
Section 1962(a) aims to prevent “the use of racketeering money to
acquire legitimate companies.” USA Certified Merchs., LLC v. Koebel, 262 F.
Supp. 2d 319, 330 (S.D.N.Y. 2003) (citing Nat’l Org. for Women, Inc. v.
Scheidler, 510 U.S. 249, 259 (1994)); see also Ideal Steel Supply Corp. v. Anza,
652 F.3d 310, 320 (2d Cir. 2011) (“RICO provisions such as [Section] 1962(a)
reflect Congress’s concern about the control of otherwise legitimate business
concerns ‘acquired by the sub rosa investment of profits acquired from illegal
ventures.’” (citations omitted)), cert denied 565 U.S. 1241 (2012). In light of
their differing policy objectives, what qualifies as an “enterprise” under Section
1962(a) can differ from what qualifies as an enterprise under other provisions
of the RICO statute:
111
Case 1:21-md-02989-CMA
Case 1:19-cv-09236-KPF
Document 429-1
Document 182
Entered on
FiledFLSD
09/28/21
Docket
Page 112
10/22/2021
of 127
Page 113 of
128
The “enterprise” referred to in subsections (a) and (b) is
thus something acquired through the use of illegal
activities or by money obtained from illegal activities.
The enterprise in these subsections is the victim of
unlawful activity and may very well be a “profit-seeking”
entity that represents a property interest and may be
acquired. But the statutory language in subsections (a)
and (b) does not mandate that the enterprise be a
“profit-seeking” entity; it simply requires that the
enterprise be an entity that was acquired through illegal
activity or the money generated from illegal activity.
By contrast, the “enterprise” in subsection (c) connotes
generally the vehicle through which the unlawful
pattern of racketeering activity is committed, rather
than the victim of that activity. Subsection (c) makes it
unlawful for “any person employed by or associated
with any enterprise ... to conduct or participate ... in the
conduct of such enterprise’s affairs through a pattern
of racketeering activity....” Consequently, since the
enterprise in subsection (c) is not being acquired, it
need not have a property interest that can be acquired
nor an economic motive for engaging in illegal activity;
it need only be an association in fact that engages in a
pattern of racketeering activity.
Scheidler, 510 U.S. at 259; accord Tooker v. Guerrera, No. 15 Civ. 2430 (JS)
(ARL), 2017 WL 3475994, at *7 (E.D.N.Y. Aug. 11, 2017) (“Unlike Section
1962(c), the Section 1962(a) and (b) ‘enterprise’ is ‘not intended to be the
vehicle through which a pattern of racketeering is undertaken, but a separate,
legitimate entity purchased through moneys raised through racketeering.’”
(citing Koebel, 262 F. Supp. 2d at 330-31)); Rush v. Oppenheimer & Co., Inc.,
628 F. Supp. 1188, 1196-97 (S.D.N.Y. 1985) (“Thus where section 1962(c)
envisions the racketeering acts conducted through the enterprise, section
1962(a) portrays the enterprise as the investment object of the criminal
violators.”).
112
Case 1:21-md-02989-CMA
Case 1:19-cv-09236-KPF
Document 429-1
Document 182
Entered on
FiledFLSD
09/28/21
Docket
Page 113
10/22/2021
of 127
Page 114 of
128
A further distinction among civil RICO claims is that “there is no
requirement under section 1962(a) (as opposed to section 1962(c)) that the
‘person’ be distinct from the ‘enterprise.’” Riverwoods Chappaqua Corp. v.
Marine Midland Bank, N.A., 30 F.3d 339, 345 (2d Cir. 1994), abrogated on other
grounds by Cedric Kushner Promotions, Ltd. v. King, 533 U.S. 158, 159 (2001).
Precisely because Section 1962(a) eschews this requirement, “[t]he ‘enterprise’
in [Section 1962(a)] is not necessarily the racketeering enterprise in [Section]
1962(c), but refers to an ‘entity purchased through moneys raised through
racketeering.’” 4 K & D Corp., 2 F. Supp. 3d at 544 (quoting Koebel, 262 F.
Supp. 2d at 330-31).
All of that said, Plaintiffs must still allege a qualifying enterprise. As
defined in the RICO statute, an “enterprise” includes “any individual,
partnership, corporation, association, or other legal entity, and any union or
group of individuals associated in fact although not a legal entity.” 18 U.S.C.
§ 1961(4). This broad definition “has a wide reach.” Red Fort Cap., Inc. v.
Guardhouse Prods. LLC, 397 F. Supp. 3d 456, 467 (S.D.N.Y. 2019) (quoting
Boyle v. United States, 556 U.S. 938, 944 (2009)). The Supreme Court has
further explained that a RICO enterprise is “a group of persons associated
together for a common purpose of engaging in a course of conduct,” the
existence of which is proven “by evidence of an ongoing organization, formal or
informal, and by evidence that the various associates function as a continuing
unit.” United States v. Turkette, 452 U.S. 576, 583 (1981); accord United States
v. Applins, 637 F.3d 59, 73 (2d Cir. 2011).
113
Case 1:21-md-02989-CMA
Case 1:19-cv-09236-KPF
Document 429-1
Document 182
Entered on
FiledFLSD
09/28/21
Docket
Page 114
10/22/2021
of 127
Page 115 of
128
While the enterprise requirement is “most easily satisfied when the
enterprise is a formal legal entity ... [,] an association-in-fact may also be a
RICO enterprise.” Palatkevich v. Choupak, No. 12 Civ. 1681 (CM), 2014 WL
1509236, at *11 (S.D.N.Y. Jan. 24, 2014) (internal quotation marks omitted)
(citing First Cap. Asset Mgmt., Inc. v. Satinwood, Inc., 385 F.3d 159, 173 (2d
Cir. 2004)). “An association-in-fact enterprise must have, at a minimum, the
following structural features: ‘a purpose, relationships among those associated
with the enterprise, and longevity sufficient to permit these associates to
pursue the enterprise’s purpose.’” Mayfield v. Asta Funding, Inc., 95 F. Supp.
3d 685, 699 (S.D.N.Y. 2015) (quoting Boyle, 556 U.S. at 946).
Accepting for present purposes Plaintiffs’ allegation that the debased
USDT constitutes the “proceeds” of Defendants’ racketeering acts, the Court
nonetheless concludes that Plaintiffs have failed to allege a qualifying
enterprise into which these proceeds were invested. To begin, Plaintiffs’
articulation of the Section 1962(a) enterprise is decidedly conclusory:
The [DigFinex] Defendants used their self-issued,
debased USDT in the operation of an association-in-fact
enterprise, whose purpose was to artificially inflate
cryptocommodity prices and profit therefrom. That
enterprise consisted of the Tether Defendants, the
Bitfinex Defendants, the Individual Defendants,
Poloniex, and Bittrex (the “Count Nine Enterprise”).
(CAC ¶ 555). Nothing in this paragraph explains how this enterprise is
anything other than an arbitrary, artificial creation, reverse-engineered
specifically to satisfy Section 1962(a)’s requirement.
114
Case 1:21-md-02989-CMA
Case 1:19-cv-09236-KPF
Document 429-1
Document 182
Entered on
FiledFLSD
09/28/21
Docket
Page 115
10/22/2021
of 127
Page 116 of
128
Worse yet, Plaintiffs fail to draw any meaningful distinctions between the
Section 1962(a) “entity” enterprise charged in Count Nine and the Section
1962(c) “vehicle” enterprise charged in Count Eight. (See CAC ¶¶ 550, 553
(alleging that the DigFinex Defendants “engaged in a pattern of racketeering
activity, as described in Count Eight”); see also id. at ¶¶ 454-473 (describing
the Count Eight RICO enterprise in extensive detail)). There is near-complete
overlap between the members of these two purported enterprises (compare id.
at ¶ 550, with id. at ¶ 555), and Plaintiffs allege no distinctions between the
organizations, backgrounds, or structures of the two enterprises. The principal
difference alleged is a conclusory assertion that one had the goal of issuing
unbacked USDT, while the other had the goal of using the unbacked USDT to
buy cryptocommodities. (Compare id. at ¶ 553, with id. at ¶ 555). But
elsewhere in the Amended Complaint, Plaintiffs go to great lengths to establish
that the DigFinex Defendants, the Exchange Defendants, and the CC
Defendants were all willing participants in the conspiracy to use unbacked
USDT to purchase cryptocommodities with the goal of inflating
cryptocommodity prices. (See, e.g., id. at ¶¶ 419-427). Finally, and most fatal
to their claims, Plaintiffs have failed to allege “a separate, legitimate entity
purchased through moneys raised through racketeering.” Tooker, 2017 WL
3475994, at *7 (citing Koebel, 262 F. Supp. 2d at 330-31). 48
48 To be clear, the Court recognizes, and does not penalize, Plaintiffs for pleading their
RICO claims in the alternative. But while the Moving Defendants have not challenged
the adequacy of the enterprise allegations for Count Eight, the B/T Defendants have
115
Case 1:21-md-02989-CMA
Case 1:19-cv-09236-KPF
Document 429-1
Document 182
Entered on
FiledFLSD
09/28/21
Docket
Page 116
10/22/2021
of 127
Page 117 of
128
Put simply, given the nature of their allegations, Plaintiffs cannot satisfy
the enterprise pleading requirements of Section 1962(a) merely by shuffling the
deck of their Section 1962(c) enterprise. For this reason, their Section 1962(a)
claim must be dismissed. Of note, however, Plaintiffs’ failure to plead a Section
1962(a) enterprise has ripple effects for the remaining pleading requirements.
One such deficiency concerns the “investment” requirement of the statute;
because Plaintiffs have failed to allege a qualifying enterprise, Plaintiffs have
also failed to allege the investment of any proceeds of racketeering activity in
the “acquisition of any interest in, or the establishment or operation of” a
commerce-affecting enterprise. 18 U.S.C. § 1962(a). Indeed, even were the
Court to find that Plaintiffs’ Count Nine Enterprise had been adequately
pleaded, it would still have difficulty finding the investment requirement
satisfied. The gravamen of Plaintiffs’ argument is that Defendants’ racketeering
acts yielded proceeds in the form of “debased USDT, which had the market
value of U.S. dollars and was freely exchangeable at that value for other
assets.” (CAC ¶ 554). Yet the ensuing transactions — “transfers of debased
USDT from Tether to the Bitfinex crypto-exchange, and then to the Bittrex and
Poloniex crypto-exchanges, where the debased USDT was sold for
cryptocommodities” (id. at ¶ 556) — would not qualify as “investments,” either
in the Count Nine Enterprise as alleged or any of its constituent entities.
challenged the adequacy of the enterprise allegations for Count Nine, and the Court
agrees that they are deficient for Section 1962(a) purposes.
116
Case 1:21-md-02989-CMA
Case 1:19-cv-09236-KPF
Document 429-1
Document 182
Entered on
FiledFLSD
09/28/21
Docket
Page 117
10/22/2021
of 127
Page 118 of
128
Finally, Plaintiffs have failed to allege a qualifying injury. To state a
claim under Section 1962(a), a plaintiff must allege “injury from the
defendant’s investment of the racketeering income[.]” Ouaknine v. MacFarlane,
897 F.2d 75, 83 (2d Cir. 1990). The Second Circuit has suggested that a
broader range of injuries could suffice to state a claim under Section 1962(a)
than under Section 1962(c):
Further, the numerous disjuncts in [Section] 1962(a)
create a broad prohibition. Assuming a pattern of
racketeering activity and a commerce-affecting
enterprise, both the funds derived “directly or
indirectly” from such activity and the “proceeds of such
income” are tainted: no part of the “income, or the
proceeds of such income” may lawfully be “use[d] or
invest[ed],” whether “directly or indirectly,” in “the
establishment or operation” of that enterprise. Thus,
although the injury alleged to result from the violation
of subsection (a) — as from the violation of any other
subsection of [Section] 1962 — must be sufficiently
directly related to the violation to meet the legal
standard of proximate cause implied in [Section]
1964(c), the many disjuncts in [Section] 1962(a) mean
that any of dozens of combinations or permutations will
constitute a violation of that section.
Ideal Steel Supply Corp. v. Anza, 652 F.3d 310, 322 (2d Cir. 2011). Even then,
Plaintiffs must allege an injury caused by the investment of the racketeering
proceeds, and not merely by the predicate acts. Plaintiffs’ failures to allege a
qualifying enterprise or a qualifying investment foreclose their ability to plead
injury cognizable under Section 1962(a).
***
Because Plaintiffs did not adequately allege a substantive violation of
RICO in either Count Eight or Count Nine, the Court also dismisses Count Ten,
117
Case 1:21-md-02989-CMA
Case 1:19-cv-09236-KPF
Document 429-1
Document 182
Entered on
FiledFLSD
09/28/21
Docket
Page 118
10/22/2021
of 127
Page 119 of
128
which alleges a RICO conspiracy in violation of Section 1962(d). See First Cap.
Asset Mgmt., Inc., 385 F.3d at 182 (collecting cases).
d. State Law Claims 49
Finally, Plaintiffs allege state law claims against Tether, Bitfinex, and the
Individual Defendants for common law fraud and a violation of GBL § 349. 50
For the reasons discussed herein, the Court denies Defendants’ motions to
dismiss Count Eleven, Plaintiffs’ common law fraud claim, but grants
Defendants’ motions to dismiss Count Twelve, Plaintiffs’ GBL § 349 claim. 51
49 In this subsection, the term “Defendants” is intended to refer jointly to Tether, Bitfinex,
and the Individual Defendants, except where explicitly stated otherwise.
50 No party suggests that the Court should apply the law of a state other than New York.
(See generally B/T Br.; Potter Br.; Pl. Opp.; B/T Reply; Potter Reply). New York courts
apply an “interest analysis” to choice of law issues involving torts, which analysis seeks
“to effect the law of the jurisdiction having the greatest interest in resolving the
particular issue[.]” Cooney v. Osgood Mach., Inc., 81 N.Y.2d 66, 72 (1993). Here, all but
one of the named Plaintiffs are citizens of New York, and those Plaintiffs purchased
cryptocommodities in New York in reliance on Defendants’ purported fraudulent
misstatements, and were also subsequently injured in New York by Defendants’
purported misconduct. See, e.g., id. at 72-74. Thus, New York is the jurisdiction with
the greatest interest in the matter, and the Court will apply New York law to Claims
Eleven and Twelve.
51 Defendants ask the Court to decline to exercise supplemental jurisdiction over Plaintiffs’
state law claims, arguing that “a ‘district court usually should decline the exercise of
supplemental jurisdiction when all federal claims have been dismissed at the pleading
stage.’” (B/T Br. 36 (quoting Denney v. Deutsche Bank AG, 443 F.3d 253, 266 (2d Cir.
2006))). However, as noted above, the Court declines to dismiss all federal claims.
When a district court has original jurisdiction in a civil action, it also “shall have
supplemental jurisdiction over all other claims that are so related to claims in the
action within such original jurisdiction that they form part of the same case or
controversy under Article III of the United States Constitution.” 28 U.S.C. § 1367(a).
Plaintiffs’ state law claims arise out of the same conduct and seek redress for the same
harm as Plaintiffs’ federal claims. Accordingly, considerations of “economy,
convenience[,] [and] fairness,” In re Methyl Tertiary Butyl Ether Prods. Liability Litig., 510
F. Supp. 2d 299, 329-30 & n.137 (S.D.N.Y. 2007) (citing City of Chicago v. Int’l Coll. of
Surgeons, 522 U.S. 156, 173 (1997)), weigh in favor of the Court’s exercise of
supplemental jurisdiction over Plaintiffs’ state law claims, and the Court addresses the
merits of Defendants’ motions to dismiss Counts Eleven and Twelve.
118
Case 1:21-md-02989-CMA
Case 1:19-cv-09236-KPF
Document 429-1
Document 182
Entered on
FiledFLSD
09/28/21
Docket
Page 119
10/22/2021
of 127
Page 120 of
128
i. Plaintiffs Adequately Allege Common Law Fraud
“To state a claim for fraud under New York law, a plaintiff must allege
that (i) the defendant made a misrepresentation or material omission of fact,
(ii) that was false and known to be false by the defendant, (iii) made for the
purpose of inducing the plaintiff to rely upon it, (iv) the plaintiff’s justifiable
reliance on the misrepresentation or material omission, and (v) injury.”
Cosgrove v. Or. Chai, Inc., 520 F. Supp. 3d 562, 587 (S.D.N.Y. 2021) (citing
Pasternack v. Lab’y Corp. of Am. Holdings, 27 N.Y.3d 817, 827 (2016); In re
Fyre Festival Litig., 399 F. Supp. 3d 203, 212-13 (S.D.N.Y. 2019)). Claims for
fraud, even under state law, must satisfy the heightened pleading requirements
of Rule 9(b). See Premium Mortg. Corp. v. Equifax, Inc., 583 F.3d 103, 108 (2d
Cir. 2009); see generally Malvar Egerique v. Chowaiki, No. 19 Civ. 3110 (KPF),
2020 WL 1974228, at *23 (S.D.N.Y. Apr. 24, 2020).
In moving to dismiss, Defendants contend that Plaintiffs have not
adequately pleaded actual reliance or damage causation. (See B/T Br. 36-38;
B/T Reply 21-24). Potter further argues that Plaintiffs’ allegations as to him
are insufficiently specific to meet Rule 9(b)’s stringent pleading requirements.
For the reasons discussed below, the Court disagrees with Defendants and
denies their motions to dismiss Count Eleven.
Defendants first argue that Plaintiffs fail to allege reliance with the
requisite particularity because Plaintiffs do not plead facts to show that any of
the individual purchases listed in the Amended Complaint was made in “actual
reliance” on any of Defendants’ purported misrepresentations. (See B/T
119
Case 1:21-md-02989-CMA
Case 1:19-cv-09236-KPF
Document 429-1
Document 182
Entered on
FiledFLSD
09/28/21
Docket
Page 120
10/22/2021
of 127
Page 121 of
128
Br. 36). Plaintiffs rejoin that in the market manipulation context, “reliance on
artificial market prices suffices” and that Plaintiffs have pleaded such reliance.
(Pl. Opp. 66; see also CAC ¶ 579). 52 Plaintiffs rely on Minpeco, S.A. v.
ContiCommodity Servs., Inc. (“Minpeco I”), 552 F. Supp. 332 (S.D.N.Y. 1982),
and its progeny in support of their market manipulation theory of reliance.
(See Pl. Opp. 66-67 (collecting cases)).
In Minpeco, the district court held that the defendants’ manipulation of
the price of silver through monopolization of the silver market entitled plaintiff
to a presumption of reliance in alleging fraud under New York law, even though
the court noted the question of reliance in such a context was an open one
under New York law. 552 F. Supp. at 335-38; see also Minpeco, S.A. v. Hunt
(“Minpeco II”), 718 F. Supp. 168, 176 (S.D.N.Y. 1989). Subsequently, sister
courts in this District have followed Minpeco I in finding that, in a common law
fraud action under New York law alleging market manipulation activity, the
reliance element may be satisfied at the motion to dismiss stage by an
averment that the plaintiff relied on the integrity of the market. See Fezzani v.
Bear, Stearns & Co., 384 F. Supp. 2d 618 (S.D.N.Y. 2004) (explaining that case
law in this District supports the argument that common-law fraud can be
52 The Court disagrees with Defendants’ characterization of the Amended Complaint as
failing to allege that Plaintiffs relied on artificial market prices. (See B/T Reply 21-22).
Plaintiffs adequately alleged that they generally relied on Defendants’
misrepresentations “when purchasing cryptocommodities at artificially high prices
caused by these materially false statements and omissions.” (CAC ¶ 579). Nor can the
Court find, as a matter of law, that Plaintiffs knew the markets were inefficient at the
time they purchased cryptocommodities, as Defendants argue. (See B/T Reply 21).
Accordingly, the Court declines to dismiss Plaintiffs’ fraud claim on those grounds.
120
Case 1:21-md-02989-CMA
Case 1:19-cv-09236-KPF
Document 429-1
Document 182
Entered on
FiledFLSD
09/28/21
Docket
Page 121
10/22/2021
of 127
Page 122 of
128
established on a market manipulation theory), reconsideration denied in
relevant part, No. 99 Civ. 793 (RCC), 2004 WL 1781148 (S.D.N.Y. Aug. 10,
2004); Vandenberg v. Adler, No. 98 Civ. 3544 (WHP), 2000 WL 342718, at *12
(S.D.N.Y. Mar. 31, 2000) (“Allegations of direct and knowing participation in a
market manipulation scheme that injured plaintiff is sufficient to state a fraud
claim under common law.”); Scone Invs., L.P. v. Am. Third Mkt. Corp., No. 97
Civ. 3802 (SAS), 1998 WL 205338, at *10 (S.D.N.Y. Apr. 28, 1998) (“In a
common law fraud action [under New York law] alleging market manipulation,
the reliance element may be satisfied by averment that the plaintiff relied on
the integrity of the market.”); Schultz v. Com. Programming Unlimited Inc.,
No. 91 Civ. 7924 (LJF), 1992 WL 396434, at *3 (S.D.N.Y. Dec. 23, 1992) (“[I]n
the context of allegations of market manipulation a New York court may only
require a plaintiff to allege reliance on the integrity of the market to satisfy the
reliance element of common law fraud.”); In re Blech Sec. Litig., 961 F. Supp.
569, 587 (S.D.N.Y. 1997) (same).
The cases cited by Defendants are not to the contrary. While Defendants
are correct that in Pasternack v. Laboratory Corporation of America Holdings, 27
N.Y.3d at 817, the New York Court of Appeals generally “decline[d] to extend
the reliance element of fraud to a claim based on the reliance of a third party,
rather than plaintiff,” id. at 829, the Court of Appeals acknowledged that fraud
is actionable where a third party “acted as a conduit to relay the false
statement to plaintiff, who then relied on the misrepresentation to his
detriment,” id. at 828. As such, the Court agrees with Plaintiffs that the
121
Case 1:21-md-02989-CMA
Case 1:19-cv-09236-KPF
Document 429-1
Document 182
Entered on
FiledFLSD
09/28/21
Docket
Page 122
10/22/2021
of 127
Page 123 of
128
market manipulation scheme described in the Amended Complaint resembles
this “conduit” theory of third-party reliance, and that Pasternack therefore does
not foreclose reliance in this case.
Next, Defendants cite two Second Circuit cases, Pennsylvania Public
School Employees’ Retirement System v. Morgan Stanley & Co., Inc. (“PSERS”),
772 F.3d 111 (2d Cir. 2014), and Securities Investor Protection Corporation v.
BDO Seidman, LLP (“SIPC”), 222 F.3d 63 (2d Cir. 2000), to argue that “the
Second Circuit ‘repeatedly has refused to apply’ ... the fraud-on-the-market
theory, ‘to state common law cases.’” (B/T Reply 22 (alteration omitted)
(quoting PSERS, 772 F.3d at 121)). But Defendants’ argument works a sleight-
of-hand on Plaintiffs’ claims. Neither PSERS nor SIPC addresses market
manipulation claims; instead, the plaintiffs in both cases alleged fraud arising
out of specific misrepresentations or omissions. See In re Blech, 961 F. Supp.
at 587 (“It is true that a fraud on the market theory is not available in cases
alleging misrepresentations or omissions. However, in the context of market
manipulation, New York law requires only that a plaintiff allege reliance on the
integrity of the market to satisfy the reliance element of common law fraud.”
(internal citations omitted) (collecting cases)). Recognizing still that neither the
Second Circuit nor New York State courts have yet provided a definitive answer
to the question first addressed in Minpeco — i.e., whether under New York law,
in a market manipulation case, allegations of reliance on the integrity of the
market satisfies the reliance element of common law fraud — the Court finds
the reasoning employed by the Court in Minpeco and its progeny persuasive
122
Case 1:21-md-02989-CMA
Case 1:19-cv-09236-KPF
Document 429-1
Document 182
Entered on
FiledFLSD
09/28/21
Docket
Page 123
10/22/2021
of 127
Page 124 of
128
and holds that, at least at the motion to dismiss stage, Plaintiffs have
adequately pleaded reliance. Defendants’ arguments challenging the causation
element fail for the same reasons discussed above: taking all the well-pleaded
allegations in the Amended Complaint as true, Plaintiffs have adequately
alleged that Defendants’ misrepresentations regarding USDT caused Plaintiffs’
injury through a scheme to artificially inflate cryptocommodity prices.
The Court turns next to Potter’s argument that Plaintiffs fail to satisfy
Rule 9(b)’s particularity requirement. (See Potter Br. 15-16; Potter Reply 9).
The Court disagrees, again for essentially the same reason that the Court
rejected this argument with respect to Potter’s motion to dismiss Plaintiffs’
antitrust and CEA claims. Plaintiffs’ allegations of (i) Potter’s leadership role at
Tether, Bitfinex, and DigFinex; (ii) his status as co-founder of Tether; and
(iii) his willing involvement in covering up USDT’s purportedly unbacked nature
satisfy Rule 9(b) here. (See, e.g., CAC ¶¶ 24, 36, 122, 152-156, 343-347, 480).
As Plaintiffs succinctly explain, “[t]he misrepresentation about Tether being
backed dollar-for-dollar was Tether’s entire supposed business model, and one
of the key features of Tether that Potter and his co-conspirators held out to the
market.” (Pl. Opp. 71). Plaintiffs have pleaded Potter’s involvement in Tether’s
leadership from the entities’ inception through his departure in early 2018. As
such, the Court concludes that Plaintiffs “have adequately stated
circumstances that give rise to a plausible inference of knowledge and
liability[,]” In re DDAVP Direct Purchaser Antitrust Litig., 585 F.3d 677, 695 (2d
Cir. 2009), and denies Potter’s motion to dismiss Count Eleven.
123
Case 1:21-md-02989-CMA
Case 1:19-cv-09236-KPF
Document 429-1
Document 182
Entered on
FiledFLSD
09/28/21
Docket
Page 124
10/22/2021
of 127
Page 125 of
128
ii. Plaintiffs’ GBL § 349 Claim Is Dismissed
Count Twelve alleges that Defendants violated GBL § 349 by
misrepresenting that USDT was fully backed by U.S. dollars. GBL § 349
prohibits “[d]eceptive acts or practices in the conduct of any business, trade or
commerce or in the furnishing of any service in” the state of New York. GBL
§ 349(a). Defendants argue that the conduct at issue was not consumer-
oriented and that Plaintiffs failed to adequately allege that they suffered a
direct injury as a result of Defendants’ allegedly deceptive conduct. (See B/T
Br. 38-40; Potter Br. 17-18; B/T Reply 24-25; Potter Reply 10). The Court
agrees with Defendants that Plaintiffs fail to allege a direct injury and thus do
not have standing under GBL § 349. 53
To state a claim under GBL § 349, “‘a plaintiff must allege [i] that the
defendant ... engaged in consumer-oriented conduct; [ii] that the conduct was
materially misleading; and [iii] that the plaintiff suffered injury as a result of
the allegedly deceptive act or practice.’” Cosgrove, 520 F. Supp. 3d at 575
(quoting Weisblum v. Prophase Labs, Inc., 88 F. Supp. 3d 283, 292 (S.D.N.Y.
2015)); see also Spagnola v. Chubb Corp., 574 F.3d 64, 74 (2d Cir. 2009).
While “standing under [GBL § 349] had been extended to consumers and
53 The Court is aware of the unsettled nature of crypto-assets under the securities and
commodities laws. See, e.g., Barron v. Helbiz Inc., No. 20 Civ. 4703 (LLS), 2021 WL
229609, at *4 (S.D.N.Y. Jan. 22, 2021) (conducting a fact-intensive inquiry into the
development and use of “Helbiz Coin,” a type of crypto-asset, and thereafter holding
that it is a security). Here, the Court does not decide whether USDT is a security,
commodity, or some other type of good or asset. Nor does the Court decide whether
USDT is consumer-facing. As such, this decision should not be read to foreclose the
possibility that consumers of USDT have standing to pursue a claim under GBL § 349.
124
Case 1:21-md-02989-CMA
Case 1:19-cv-09236-KPF
Document 429-1
Document 182
Entered on
FiledFLSD
09/28/21
Docket
Page 125
10/22/2021
of 127
Page 126 of
128
competitors, the statute had not yet been interpreted to grant a right of action
to parties not suing in either of those capacities.” City of New York v. Smokes-
Spirits.Com, Inc., 12 N.Y.3d 616, 621 (2009) (citing GBL § 349(h)).
Furthermore, “‘derivative actions are barred’ under section 349’” and as such, a
plaintiff alleging only an indirect or derivative injury does not have standing
under GBL § 349. Id. at 622 (quoting Blue Cross & Blue Shield of N.J., Inc. v
Philip Morris USA Inc. (“BCBS of NJ”), 3 N.Y.3d 200, 207 (2004)).
Here, Plaintiffs do not allege that they are consumers of USDT, nor are
they direct competitors of Defendants. Accordingly, they do not have standing
to pursue their GBL § 349 claim. Smokes-Spirits.Com, Inc., 12 N.Y.3d at 621. 54
Additionally, Plaintiffs’ GBL § 349 claim must be dismissed as a “derivative
action” because Plaintiffs’ claimed injury — in the form of inflated
cryptocommodity prices — is entirely derivative of injuries that Plaintiffs allege
were suffered by misled consumers who exchanged cryptocommodities for
unbacked USDT. See id. at 622 (holding that plaintiff “failed to establish
standing ... because its claimed injury, in the form of lost tax revenue, is
entirely derivative of injuries that it alleges were suffered by misled consumers
who purchased defendants’ cigarettes over the Internet”). This is precisely the
54 To the extent Plaintiffs attempt to assert they are consumers of cryptocommodities, not
USDT, that claim fails because Plaintiffs clearly argue that they invested in
cryptocommodities and were injured when their investments decreased in value. (See
Pl. Opp. 1). Thus, the Court rejects such an argument for the reasons articulated in
DeAngelis v. Corzine, 17 F. Supp. 3d 270, 284 (S.D.N.Y. 2014) (“[The plaintiff] invested
funds with [defendants] as investments, not as a purchase of traditional consumer
goods. Further, the commodities markets, like the securities markets, are subject to
federal oversight and regulation. The Court thus rejects [plaintiff’s] attempt to apply
[Section] 349 in this case.”).
125
Case 1:21-md-02989-CMA
Case 1:19-cv-09236-KPF
Document 429-1
Document 182
Entered on
FiledFLSD
09/28/21
Docket
Page 126
10/22/2021
of 127
Page 127 of
128
kind of derivative injury the Court of Appeals has repeatedly foreclosed. See id.
at 621-22; accord BCBS of NJ, 3 N.Y.3d at 207; Frintzilas v. DirecTV, LLC, 731
F. App’x 71, 72 (2d Cir. 2018) (summary order) (affirming dismissal of GBL §
349 claim because pleading “that a misleading act led to further steps which
eventually harmed [plaintiffs]” is insufficient and “purely contingent on harm to
third parties”). Accordingly, Plaintiffs’ GBL § 349 claim must be dismissed. 55
55 Plaintiffs cite to the Second Department’s decision in North State Autobahn v.
Progressive Insurance Group Co., 953 N.Y.S.2d 96 (2d Dep’t 2012), to argue that
Smokes-Spirits.Com is inapposite. (See Pl. Opp. 74-75). However, North State Autobahn
does not suggest that Plaintiffs have standing to pursue their GBL § 349 claims here.
North State Autobahn dealt with a plaintiff who was a direct competitor of the
defendants. 953 N.Y.S.2d at 105-06. As noted supra, the Court of Appeals has already
explained that “standing under [GBL § 349] had been extended to consumers and
competitors.” City of New York v. Smokes-Spirits.Com, Inc., 12 N.Y.3d 616, 621 (2009)
(emphasis added). However, in Smokes-Spirits.Com, the Court of Appeals explicitly
declined to expand standing under GBL § 349 “to parties not suing in either of those
capacities.” Id.
126
Case 1:21-md-02989-CMA
Case 1:19-cv-09236-KPF
Document 429-1
Document 182
Entered on
FiledFLSD
09/28/21
Docket
Page 127
10/22/2021
of 127
Page 128 of
128
CONCLUSION
For the reasons set forth above, Defendants’ motions to dismiss are
GRANTED IN PART and DENIED IN PART. Counts Three, Eight, Nine, Ten,
and Twelve are dismissed. Count Six is dismissed in part. 56 The Moving
Defendants’ motions to dismiss are denied as to Counts One, Two, Four, Five,
Seven, and Eleven. Fowler’s motion to dismiss for lack of personal jurisdiction
is denied.
Defendants are hereby directed to file Answers to the Amended
Complaint by October 28, 2021. The Parties are directed to file a revised
proposed case management plan and joint status letter by November 18,
2021.
The Clerk of Court is directed to terminate the motions at docket entries
142, 144, 146, 148, and 167. The Clerk of Court is further directed to mail a
copy of this Opinion to Mr. Fowler at his address of record.
SO ORDERED.
Dated: September 28, 2021
New York, New York __________________________________
KATHERINE POLK FAILLA
United States District Judge
56 For the reasons discussed supra, Count Six is dismissed as to the Exchange
Defendants, the Bitfinex Defendants, the Tether Defendants, and DigFinex.
127
File and source
- File
- gov.uscourts.flsd.590042.429.1.pdf
- Size
- 855,551 bytes
- SHA-256
- bec438934a5914c34bac06b79a2b262fbcc7b48f98b0d709af802692ff56c75b
- Original
- archive.org