In November 2018, the NYAG initiated an investigation into respondents BFXNA Inc., BFXWW Inc., and iFinex Inc. (collectively, iFinex) regarding tether, a virtual currency. The investigation was prompted by liquidity concerns regarding the ability to redeem tether at the represented value. During the course of the investigation, the NYAG requested and obtained an ex parte order pursuant to General Business Law ("GBL") § 354, compelling respondents to produce documents and staying certain further actions pending the ongoing investigation into tether.
Respondents initially moved to quash or modify the ex parte order, and the modification request was granted in part. Respondents then moved to dismiss the ex parte order for, among other things, lack of specific personal jurisdiction and lack of subject matter jurisdiction, arguing that tether is not a security or commodity, and that iFinex wasn't engaged in any business activity purposefully directed at New York. That motion was denied, leading to the instant appeal.
On appeal the First Department affirmed the lower court's denial of respondents' motion to dismiss for lack of subject matter jurisdiction and lack of personal jurisdiction, finding that the trial court properly rejected respondents' attempts to limit the NYAG's investigative authority under the Martin Act.
The First Department began its decision with a discussion of the broad powers of the NYAG under the Martin Act to seek an ex parte order compelling the production of documents and testimony and enjoining respondents. The decision notes at the outset that the case raises important issues regarding the scope of the NYAG to investigate fraud under the Martin Act, and held that the trial court "properly rejected the attempts by respondents to limit [the NYAG's] lawful authority to protect New York residents."
The First Department held that, under the Martin Act's statutory scheme, once a court has issued an ex parte order pursuant to a GBL 354 application, it has no further role in the NYAG's investigation. Thus, the issuing court's authority is limited to considering a responding party's motion to modify or vacate the order. On that basis, the First Department held that there was no action or proceeding for the court to "dismiss" when respondents filed their motion to dismiss.
Nevertheless, the Court considered respondents' personal and subject matter jurisdiction arguments on the merits, and held that:
- Tether is a "commodity" under the Martin Act. The First Department held that that the Martin Act's definition of commodities was broad enough to encompass virtual currencies like tether, because commodities include "any foreign currency, any other good, article, or material." On that basis, the First Department held that the NYAG's documentary and other requests related to tether fell squarely within the subject matter jurisdiction of the NYAG's investigative authority.
- iFinex had sufficient minimum contacts in New York to exercise specific personal jurisdiction. The First Department held that there were multiple bases for exercising personal jurisdiction over iFinex, including previous trading by New York‑based customers and the New York residence and conduct of business of one of respondents' executives within the state. The Court noted that the NYAG can establish personal jurisdiction to exercise its investigative authority by a "far lighter showing" than would be required to bring a lawsuit. As the Court also noted, this means that a Martin Act Investigation can be used to develop the information required to establish personal jurisdiction for a lawsuit.
- The alleged deficiencies in service of respondents was a mere technical infirmity that could not support a finding of lack of personal jurisdiction.
The NYAG's investigation of iFinex is still underway; no charges have been brought to date.