In re: TETHER AND BITFINEX CRYPTO ASSET LITIGATION, 2021 WL 4452181 (SDNY, Sept. 8, 2021)
The Court granted in part and denied in part the Moving Defendants’ motions to dismiss, but denied in full the civil RICO claims, asserted under both section 1962(a) and 1962(c). The court first found that the section 1962(c) claims failed because of inadequate proximate causation, and found the 1962(a) claim filed because of inadequate allegation of an enterprise. See p. *44-49.
Regarding section 1962(c), the Plaintiffs alleged that Defendants 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.” 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.
Its purpose, according to Plaintiffs, was to manipulate the price of crypto-commodities 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 crypto-commodities through transactions on the Bittrex and Poloniex exchanges.
Plaintiffs claim injury as a consequence of the Count Eight Enterprise’s racketeering acts, insofar as Plaintiffs “purchas[ed] crypto-commodities at artificially inflated prices they would not have paid but for the Count Eight Defendants’ scheme. The Court focused on the issues of standing and causation wherein a plaintiff must plead, at a minimum … causation of the injury by the defendant’s violation.” stating that under RICO, causation requires both “but for” and proximate causation.
To establish proximate causation, the court discussed the factors in Supreme Court law discussing that connection between the defendant’s conduct and the plaintiff’s injury must be “direct” and “straightforward,” and must not entail “intricate, uncertain inquiries” into the extent of the defendant’s responsibility for the loss, A link that is “too remote, purely contingent, or indirect” is insufficient, and even at the pleading stage, a court should rarely “go beyond the first step” in assessing causation.
The Court discussed 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 — arose 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 crypto=commodities (money laundering, wire fraud, and unlawful money transactions).
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 crypto-commodities for the allegedly unbacked USDT — breaks the causal chain. *39. The Court agreed 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.” *40.
This Court independently identified other cases addressing proximate cause in the context of RICO market manipulation claims, but those cases are distinguishable.
Regarding the section 1962(a) claim, the court found Plaintiffs could not satisfy the enterprise pleading requirements of Section 1962(a), and because Plaintiffs 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). 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, 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 dismissed the RICO conspiracy claim.