FILED: NEW YORK COUNTY CLERK 01/04/2022 04:52 PM INDEX NO.

158119/2021
NYSCEF DOC. NO. 73 RECEIVED NYSCEF: 01/04/2022

SUPREME COURT OF THE STATE OF NEW YORK

COUNTY OF NEW YORK

In the matter of the application of

iFINEX INC., BFXNA INC., BFXWW INC.,

TETHER HOLDINGS LIMITED, TETHER
OPERATIONS LIMITED, TETHER
LIMITED, and TETHER INTERNATIONAL
LIMITED,

Petitioners,

for an Order under CPLR 78 Index No: 158119/2021

—against— Hon. Laurence L. Love

Part 63
STATE OF NEW YORK, OFFICE OF THE
ATTORNEY GENERAL, and KATHRYN
SHEINGOLD, in her official capacity as
Freedom of Information Law Appeals Officer,

Respondents,
COINDESK, INC.

Intervenor-Respondent,
regarding Freedom of Information Law
Requests G000260 and G000261.

MEMORANDUM OF LAW IN SUPPORT OF VERIFIED ANSWER BY

INTERVENOR-RESPONDENT COINDESK, INC.

KLARIS LAW, PLLC

29 Little West 12th Street
New York, NY 10014
+1 917-612-5861

Counsel for Intervenor-Respondent

January 4, 2022

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TABLE OF CONTENTS

PRELIMINARY STATEMENT ............................................................................................... 5

BACKGROUND ....................................................................................................................... 9
A. CoinDesk .............................................................................................................. 9
B. BitFinex and TOL ................................................................................................ 9
C. Disclosures and FOIL Request ........................................................................... 10
ARGUMENT........................................................................................................................... 12
I. THE REQUESTED INFORMATION IS NOT EXEMPT FROM DISCLOSURE
UNDER SECTION 87(2)(D) ...................................................................................... 13
II. PETITIONERS HAVE NOT SHOWN THAT THE INFORMATION REQUESTED
IS A BONA FIDE TRADE SECRET ......................................................................... 16
III. PETITIONERS HAVE FAILED TO SHOW THAT DISCLOSURE OF THE
INFORMATION WOULD LIKELY CAUSE SUBSTANTIAL COMPETITIVE
HARM ......................................................................................................................... 18
A. Petitioners have failed to show that release of the financial information at issue
would likely cause substantial harm................................................................... 18
B. Disclosure of compliance policies would not likely cause substantial harm ..... 20
C. Petitioners have failed to show that the disclosure of former customer data
would likely cause substantial harm................................................................... 21
IV. PETITIONERS HAVE FAILED TO SHOW THAT THE PRIVACY EXEMPTION
APPLIES...................................................................................................................... 22
V. THE COURT MAY REVIEW THE REQUESTED DOCUMENTS IN CAMERA ... 23
VI. THE PUBLIC’S INTEREST IN DISCLOSURE FAR OUTWEIGHS ANY
INTEREST PETITIONERS MIGHT HAVE IN THE INFORMATION ................... 23
CONCLUSION ....................................................................................................................... 25

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TABLE OF AUTHORITIES

Page(s)
Cases

Art of Living Foundation v. Does, No. 10–CV–05022, 2011 WL 2441898 (N.D. Cal. June
15, 2011) ………………….………………….……………………………….………….. 18

Bahnken v. New York City Fire Dept., 17 A.D.3d 228 (2nd Dept. 2005) ………………… 14

Capital Newspapers Div. of Hearst Corp. v. Burns, 67 N.Y.2d 562 (1986) …………..14, 23

Elsevier Inc. v. Doctor Evidence, LLC, 2018 WL 557906 (S.D.N.Y. Jan. 23, 2018) ……. 17

Encore Coll. Bookstores v. Auxiliary serv. Corp. 87 N.Y.2d 410 (1995) ………………... 16

Matter of Fink v. Lefkowitz, 47 N.Y.2d 567 (1979) ………………….…………………... 23

GC Micro Corp. v. Defense Logistics Agency, 33 F.3d 1109 (9th Cir. 1994) …………… 24

Gulf & W. Indus. v United States, 615 F.2d 527, 530 (D.C. Cir. 1979) ……………… 16, 18

In Re Verizon N.Y. Inc. v. N.Y. State Pub. Serv. Comm'n, 46 Misc. 3d 858 (N.Y. Sup. Ct.
2014), aff’d 137 A.D.3d 66 (2016) …………………….…………………………………. 13

Mantica v. New York State Dept. of Health, 248 A.D. 2d 30 (3rd Dept. 1998), aff’d 94
N.Y.2d 58 (1999) …...…………………….………………………………………………. 14

Mantica v. New York State Dept. of Health, 94 N.Y.2d 58 (1999) ………………………. 14

Markowitz v. Serio, 893 N.Y. 3d 43 (2008) …………………….…………………14, 18, 23

Marietta Corp. v Fairhurst, 301 A.D.2d 734 (3rd Dept. 2003) ……….………………….. 16

Matter of Data Tree, LLC v. Romaine, 9 N.Y.3d 454 (2007) ….…………….……….….. 14

Nat’l Parks & Conservation Ass’n v. Kleppe, 547 F.2d 673 (D.C. Cir. 1973) ……….….. 18

Russo v. Nassau Community College, 81 N.Y.2d 690 (1993) …………………………… 14

New York Times Co. v. City of New York Fire Dept., 4 N.Y.3d 477 (2005) …………….. 22

Matter of Arrocha v. Board of Educ. of City of N.Y., 93 N.Y.2d 361 (1999) ……………. 13

Matter of Board of Educ. Of the Minisink Va. Cent. Sch. Dist. v. Elia, 170 A.D.3d 1472 (3rd
Dept. 2019) ………………………………………………………………………………. 13

Matter of Peckham v. Calogero, 12 N.Y.3d 424 (2009) ……………………………….... 13

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Matter of Verizon N.Y., Inc. v New York State Pub. Serv. Commn., 137 A.D.3d 66 (3rd Dep’t
2016) ………………………………………………………………………… 13, 15, 16, 17

Verizon New York, Inc. v. Bradbury 40 A.D.3d 1113 (2nd Dept. 2007) …………………. 15

Washington Post Co. v. New York State Ins. Dept. 61 N.Y.2d 557 (1984) ……………… 23

Statutes

N.Y. Pub. Off. Law § 84………………………………………………………………….. 14

N.Y. Pub. Off. Law § 87(2)(b) ……………………………………………… 7, 8, 11, 14, 22

N.Y. Pub. Off. Law § 87(2)(d) ……………………………………………………… Passim

N.Y. Pub. Off. Law § 89(2)(b) ………………………………………………………. 11, 22

N.Y. Pub. Off. Law § 89(5)(e) …………………………………………………………….14

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Intervenor-Respondent, CoinDesk, Inc., by its attorneys, Klaris Law, PLLC,

respectfully submits this memorandum of law, together with the accompanying Affirmation

of Lacy H. Koonce, dated January 4, 2022 (“Koonce Aff.”), the Affidavit of Marc Hochstein,

sworn to on December 22, 2021 (“Hochstein Aff.”), and the Affirmation of Robleh Ali, dated

December 17, 2021 (“Ali Aff.”), and the exhibits annexed thereto, all in support of

CoinDesk’s opposition to the Petition.

PRELIMINARY STATEMENT

Intervenor-Respondent CoinDesk, Inc. (“CoinDesk”) intervenes in this proceeding to

advance the public’s interest in understanding the financial underpinnings of the Tether

stablecoin, which plays an outsized role in the cryptocurrency market and an increasingly

important role in the macroeconomy. On May 19, 2021, CoinDesk made a Freedom of

Information Law (“FOIL”) request to the New York State Office of the Attorney General

(“OAG”), which was ultimately approved; Petitioners seeks to overturn the OAG’s FOIL

decision and shield the requested records about Tether from public view.

CoinDesk was founded in 2013 as a global financial media website in the early years

of the development of cryptocurrency and blockchain, with a mission to build the most

influential, trusted media platform for a global community engaged in the transformation of

the financial system and the emerging crypto economy. Hochstein Aff., ¶ 4. CoinDesk has

succeeded in this mission, growing to become the leading online news publication covering

the field, with a staff of 155 and upwards of 15 million readers per month. Id. Many

CoinDesk reporters began their careers at traditional press outlets such as The Wall Street

Journal, The New York Times, Bloomberg and CNBC. CoinDesk adheres to strict rules of

journalistic ethics. Id. ¶ 5. CoinDesk publishes upwards of 6,000 news articles per year, and

provides television programming, podcasts, newsletters, conferences and other informative

offerings. Id.

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CoinDesk has frequently reported on Petitioners iFinex Inc., BFXNA Inc., and

BFXWW Inc. (collectively “BitFinex”), their affiliate Tether Operations Limited (“TOL”),

and their roles in the cryptocurrency market, including documenting state and federal

agencies’ concerns over Petitioners’ activities. Id. ¶¶ 6, 11. TOL’s primary financial product

is a “stablecoin” known as “Tether.” Id. ¶ 6.

A stablecoin is a digital asset designed to maintain value without significant volatility

by “pegging” its value to another asset such as the U.S. dollar, which the issuer holds in

reserve to back the stablecoin. Id. ¶ 7. The Tether stablecoin is intended to trade at $1.00

US. Affidavit of Abe Chernin (Dkt. 28) (“Chernin Aff.”), ¶ 7. With reportedly nearly 70

billion Tethers in circulation, the stablecoin plays an important role in the digital currency

ecosystem, and some observers have worried that a loss in confidence in Tether could have

an outsized effect on not just that ecosystem but also the traditional financial markets.

Koonce Aff., Ex. A. Indeed, the U.S. Office of the Treasury recently released a report on

stablecoins in which it addressed some of the risks and regulatory gaps relating to these

products, and potential impacts on the wider economy (id., Ex. F), and the U.S. House of

Representatives recently held a hearing on digital assets that included a discussion on the rise

of stablecoins. Ali Aff., Ex. G.

CoinDesk’s reporting on Petitioners has included articles documenting the concerns

of state and federal agencies over the stability of Tether’s purported reserve backing, and

their resulting investigations into Petitioners. Hochstein Aff., ¶ 11, Ex. E. These

investigations included a probe by the OAG as part of its effort to “protect investors from

fraudulent and deceptive virtual or “crypto” currency trading platforms” (id., ¶ 13, Ex. F),

which culminated in a settlement agreement between the OAG and Petitioners in February

2021 (the “Settlement Agreement”). CoinDesk Verified Answer (“Answer”), Ex. 1. The

Settlement Agreement required Petitioners to cease any further trading with New York

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individuals and entities, pay $18.5 million dollars in penalties, and take steps to increase

transparency, including ongoing disclosures to the OAG and the public of the breakdown of

the dollar reserves backing tethers. Answer, Ex. 1, ¶ 57.

In May 2021, as part of the Settlement Agreement, Petitioners disclosed to the public

limited information about the breakdown of the reserves backing Tether, in the form of two pie

charts. Koonce Aff., Ex. B. The limited information from Petitioners did not provide enough

detail for news outlets such as CoinDesk to report to the public a complete picture of what

actually makes up the reserves, or on the credit worthiness of the non-cash assets, which appear

from the breakdown to make up the majority of the reserves. Hochstein Aff., ¶ 15

To bring transparency to the public, CoinDesk shortly thereafter filed a FOIL request

on May 19, 2021, to the OAG requesting information on the asset reserve composition details

backing Tether, including a document TOL appeared to have sent the OAG in May 2021 (the

“Request”). Id., Ex. I. The OAG initially determined it would withhold certain documents

and redact others responsive to the Request on the basis that they were exempt from

disclosure under Public Officers Law (“POL”) § 87(2)(d) or § 87(2)(b). Answer, Ex. 2. After

CoinDesk appealed the OAG’s decision, the OAG’s Records Appeals Officer (“RAO”)

agreed with CoinDesk and determined the responsive documents should be disclosed in full,

subject to redactions to protect certain privacy interests. Id., Ex. 3.

In response, Petitioners filed this instant Article 78 proceeding to seek to overturn the

RAO’s findings on administrative appeal and to deny access to or redact the documents

responsive to the Request. On December 6, 2021, Respondents filed their Verified Answer in

response, arguing that the Petitioners’ requests for relief should each be dismissed,

maintaining that the OAG “reasonably determined that the thirteen records at issue do not fall

under the trade secret FOIL exemption” (OAG Verified Answer ¶ 47), and arguing that the

proper procedure for determining whether certain records fall within a statutory exemption is

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an in camera review of the responsive records by the Court. OAG Verified Answer ¶¶ 42-47.

CoinDesk has no objection to the Court’s in camera review as needed. However, for the

reasons set forth below, Petitioners have failed to make any valid arguments in the first

instance that the exemptions to disclosure of the records under POL § 87(2)(d) or § 87(2)(b)

even apply here.

Petitioners’ application for relief should be denied and the Petition should be

dismissed for a host of reasons. First and foremost, Petitioners have not met their heavy

burden to establish that the exemptions pursuant to POL § 87(2)(d) or § 87(2)(b) apply to the

types of information at issue. The public policy of open disclosure underpinning FOIL

requires that any exemption to disclosure is narrowly construed and its application supported

by specific and particularized evidence. Petitioners’ argument that the information in

question is either a trade secret or would cause substantial competitive harm is contrafactual

and indeed entirely speculative, relying as it does on its own Petition and on one affidavit

setting forth “evidence” that itself is mere speculation.

Second, irrespective of whether the withheld or redacted information would be

deemed a trade secret or the disclosure of such information would cause substantial injury to

Petitioners, the public interest in the information far outweighs any competitive interest

Petitioners may have in such information. Petitioners have expressly committed to the OAG

and the public to be transparent as to the extent to which Tether is backed by reserves and the

composition of such reserves, on which they have a documented history of misleading the

public. Yet Petitioners continue to treat the public with disdain, and this has now extended to

CoinDesk, the OAG and this proceeding, as one of TOL’s top executives recently tweeted a

crude, juvenile meme mocking CoinDesk’s Request. Hochstein Aff., Ex. J. Petitioners’

evasion of public accountability must end.

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BACKGROUND

A. CoinDesk

CoinDesk is a leading online news publication that covers the digital currency field

and is dedicated to bringing transparency and clarity to the complicated crypto economy for

the public, including traders, investors and other interested parties. Hochstein Aff., ¶ 4.

CoinDesk has the largest group of crypto journalists in the world, experts on this

industry who have for years reported frequently on Petitioners, before, during and after the

OAG’s investigation into Petitioners. Id., Exs. A-E . CoinDesk is therefore in a unique

position to understand and inform the public on issues in the cryptocurrency and blockchain

market.

B. BitFinex and TOL

BitFinex is one of the world’s largest cryptocurrency exchanges, operating an online

trading platform for exchanging and trading virtual currency, as well as allowing traders to

deposit, withdraw and convert traditional (or “fiat”) currency. Verified Petition (Dkt. 1)

(“Ver. Pet.”), ¶ 6; Answer, Ex. 1, ¶ 6.

TOL created one of the first cryptocurrencies, Tethers, to peg its market value to a fiat

currency in 2014 and continues to issue Tethers, which are the largest stablecoins by market

capitalization. Chernin Aff. ¶¶ 7-8. TOL issues Tethers to users in exchange for dollars, at

which point users can send Tethers to cryptocurrency exchanges and trade Tethers against

other cryptocurrencies, including Bitcoin and Ether, that is, betting on Tethers’ value.

Koonce Aff., Ex. A. Tethers, along with other similar cryptocurrencies, are known as

“stablecoins.” Stablecoins are designed to be pegged to other assets, commodities or a

national currency to provide stability in value, particularly in volatile markets. Hochstein

Aff., ¶ 7. Stablecoins are typically created in exchange for fiat currency that an issuer of the

stablecoin receives from a third party user. Koonce Aff., Ex. F. Many stablecoins, including

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Tethers, offer a promise that they can be redeemed at par with a fiat currency upon request by

the users. Id. For Tethers, the primary purpose of the stablecoin is to maintain its value of

$1 at all times, and to maintain its relative value in the market. Chernin Aff. ¶ 4. TOL long

represented to the public that for every outstanding Tether issued and trading in the market,

TOL held one U.S. dollar (“USD”) in reserve backing the Tether. Hochstein Aff. ¶ 8.

Specifically, according to the Settlement Agreement, from 2014 until late February

2019, TOL represented that every outstanding Tether was backed by and should be valued at

one dollar, including claims to users that “Every [T]ether is always backed 1-to-1, by

traditional currency held in our reserves. So 1 USDT [Tether] is always equivalent to 1

USD.” Answer, Ex. 1, ¶ 9. In November 2018, after BitFinex suffered massive losses of

funds, TOL made a public statement that “USDT in the market are fully backed by US

dollars that are safely deposited in our bank accounts”. Id. ¶ 42.

The OAG found the foregoing claims, amongst other public statements made by TOL

between 2014 and 2019, misleading and misrepresentative of the status of the reserves

backing Tethers. In addition to the OAG, the Commodity Futures Trading Commission

(“CFTC”) has also recently found that TOL, between June 2016 and February 2019,

misrepresented to the public that Tethers were backed 100% by corresponding fiat assets

when in fact the reserves were not fully backed the majority of the time and, on October 15,

2021, ordered TOL to pay a civil monetary penalty of US$41 million for making untrue or

misleading statements and omissions of material fact in connection with Tethers. Koonce

Aff., Exs. D-E.

C. Disclosures and FOIL Request

In connection with the Settlement Agreement, in May 2021, TOL disclosed to the

public a breakdown of reserves backing Tether in the form of two pie charts. Koonce Aff.,

Ex. B. Those charts, which merely provided a high-level overview, disclosed that only 76%

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of Tether’s reserves were in cash, cash equivalents and other commercial paper, of which

only 3.87% of the Tethers were reported to be backed by US dollars in cash. This was a far

cry from the 100% backing claimed prior to the OAG’s investigation. Koonce Aff., Ex. D.

Further, the pie charts were not sufficient to allow CoinDesk to report to the public on a

complete picture of what actually makes up the reserves, or any reporting on the credit

worthiness of the non-cash assets that appear from the breakdown to make up the majority of

the reserves. Hochstein Aff. ¶ 15.

As a result, and in the interests of transparency and the public, CoinDesk submitted its

FOIL Request on May 19, 2021, seeking information on the asset reserve composition details

backing Tether. Id. Ex. I.

In a letter dated July 21, 2021, the OAG informed CoinDesk that, on the basis of

arguments received from Petitioners, it would be withholding certain documents responsive

to the Request, and redacting information from other documents, pursuant to the exemption

under POL § 87(2)(d). The responsive documents identified by the OAG were “documents

reflecting the Companies’ assets and holdings, a document describing the Companies’ AML

program and the Quarterly Report as mandated by the Settlement Agreement” (the

“Responsive Documents”). Answer, Ex. 2.

In a letter dated July 29, 2021, CoinDesk appealed the OAG’s decision of July 21,

2021 arguing that (a) POL § 87(2)(d) did not apply and that the OAG had not met the burden

of proving the information to be withheld or redacted constituted trade secrets or would cause

substantial injury to Petitioners’ competitive position; and (b) the public interest in disclosure

of this information far outweighed any interest Petitioners might have in the purported trade

secrets. In its appeal, CoinDesk accepted that data identifying individual customers properly

could be redacted pursuant to POL §§ 87(2)(b) and 89(2)(b)(iv). Id., Ex. 3.

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On August 13, 2021, in its final agency determination, the RAO agreed with

CoinDesk and reversed the OAG’s initial findings, determining that the records requested

would be disclosed in full, subject only to redactions of data identifying individual customers

and the account numbers of institutional numbers. Id., Ex. 4. The RAO found that Petitioners

had failed to meet their burden of proving entitlement to withholding the records under POL

§ 82(2)(d) on the basis that Petitioners had not submitted sufficient evidence “to persuade

[Respondent] that (1) the records at issue, if disclosed, would in fact cause the asserted

injury; and (2) if disclosure would cause the asserted injury, that the resulting injury would

substantially harm the [Petitioners’] competitive position” (emphasis in the original). Id.

On August 30, 2021, Petitioners filed this instant Petition. On December 6, 2021, the

OAG filed its Verified Answer in response to the Verified Petition, arguing that each request

of relief should be dismissed. On December 20, 2021, the Petitioners, Respondents and

CoinDesk filed a stipulation to so order stipulating that Respondents consent to CoinDesk’s

intervention and Petitioners do not object to CoinDesk intervening. On December 22, 2021,

he Court so ordered the stipulation permitting CoinDesk to intervene.

ARGUMENT

Petitioners’ application for relief should be denied and the Petition dismissed with

prejudice, for the reasons set forth below. First, Petitioners have failed to meet the heavy

burden of proving that an exemption applies to the information responsive to the Request and

consequently that an error of law was made by the Respondents. Petitioners’ reasoning for

withholding each of the identified categories of information responsive to the Request is

broad, speculative and conclusory, and Petitioners have failed to provide sufficient

particularization that such information falls squarely under POL § 87(2)(d) as it is required to

do.

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Second, even if Petitioners could sustain their burden, the public interest in disclosure

far outweighs any such consideration. Petitioners have repeatedly obfuscated as to matters

relating to the composition of Tether’s asset reserves, and indeed Attorney General James

stated in the OAG’s press release on the Settlement Agreement that “Tether’s claims that its

virtual currency was fully backed by U.S. dollars at all times was a lie.” Hochstein Aff., Ex.

F. Petitioners operate in an under-regulated industry (Koonce Aff., Ex. F) that nevertheless

takes and trades investors’ money, and without regulation the only access the public has to

vital information on the safety and security of their money is through freedom of information

requests such as this FOIL request.

I. THE REQUESTED INFORMATION IS NOT EXEMPT FROM DISCLOSURE

UNDER SECTION 87(2)(D)

The appropriate standard of review of an agency’s determination is “whether the

challenged determination is rationally based, and whether it was made in violation of lawful

procedure, was affected by an error of law or was arbitrary and capricious or an abuse of

discretion.” In Re Verizon N.Y. Inc. v. N.Y. State Pub. Serv. Comm'n, 46 Misc. 3d 858, 866

(N.Y. Sup. Ct. 2014), aff’d Matter of Verizon N.Y., Inc. v. New York State Pub. Serv. Commn.,

137 A.D.3d 66, 72 (3rd Dep’t 2016). Further, a “court may not substitute its judgment for that

of the board or body it reviews unless the decision under review is arbitrary and unreasonable

and constitutes an abuse of discretion” (Id., quoting Matter of Arrocha v. Board of Educ. of

City of N.Y., 93 N.Y.2d 361, 363–364 (1999)), even if the court would have come to a

different conclusion. Matter of Peckham v. Calogero, 12 N.Y.3d 424, 431 (2009). Where an

agency’s determination is based on its expertise in applying statutory frameworks, deference

is afforded to that determination. Matter of Board of Educ. Of the Minisink Va. Cent. Sch.

Dist. v. Elia, 170 A.D.3d 1472, 1473 (3rd Dept. 2019). Here, the RAO is responsible for

deciding administrative appeals of the Records Access Officer in response to requests under

FOIL and is familiar with the statutes, rules and case law governing FOIL. Affirmation of

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Kathryn Sheingold (Dkt. 57), ¶ 2. Petitioners have failed to show that the RAO made any

errors of law in determining whether § 87(2)(d) or § 87(2)(b) apply to the Responsive

Documents.

FOIL expresses New York’s commitment to open government and public

accountability and is premised on the recognition that “the public, individually and

collectively and represented by a free press, should have access to the records of

government”. POL § 84; Capital Newspapers Div. of Hearst Corp. v. Burns, 67 N.Y.2d 562,

566 (1986). Any exemptions, such as the one Petitioners seek to have applied here, must be

“narrowly construed to provide maximum access”. Capital Newspapers, 67 N.Y.2d 562,

566, see also Mantica v. New York State Dept. of Health, 248 A.D. 2d 30 (3rd Dept. 1998),

aff’d Mantica v. New York State Dept. of Health, 94 N.Y.2d 58 (1999); Russo v. Nassau

Community College, 81 N.Y.2d 690, 698 (1993). The party claiming that § 87(2)(d) applies

has this high burden of proving that the exemption applies. POL § 89(5)(e).

The party seeking an exemption “must present specific, persuasive evidence that

disclosure will cause it to suffer a competitive injury; it cannot merely rest on a speculative

conclusion that disclosure might potentially cause harm.” Markowitz v. Serio, 893 N.Y.3d 43,

51 (2008). The test therefore demands specific evidence to support an exemption. The

information must be shown to “fall[ ] squarely within a FOIL exemption by articulating a

particularized and specific justification for denying access.” Capital Newspapers, 67 N.Y.2d

562, 566 (1986) (citation omitted); see also Matter of Data Tree, LLC v. Romaine, 9 N.Y.3d

454, 462–463 (2007). The courts have routinely required such particularization and

specificity to warrant the application of an exemption from disclosure. See, e.g., Bahnken v.

New York City Fire Dept.,, 17 A.D.3d 228, 230 (2nd Dept. 2005) (holding that speculative

arguments unsupported by any evidentiary documentation that disclosure of contracts

between private hospitals and ambulance service companies would affect commercial

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enterprises’ ability to contract for such services did not warrant exemption from disclosure

under POL § 87(2)(d)); Verizon New York, Inc. v. Bradbury 40 A.D.3d 1113, 1115 (2nd Dept.

2007) (holding that applicant for a cable television franchise was not entitled to exemption

under FOIL from disclosure of a copy of a franchise agreement to another cable company as

it failed to establish the specific harm it would suffer if the documents were disclosed).

Here, Petitioners claim that the Responsive Documents are exempt from disclosure

under POL § 87(2)(d) (Petitioners’ Memorandum of Law in Support of Their Article 78

Petition To Declare Certain Material Exempt from FOIL Disclosure, (Dkt. 27) (“Ver. Pet.

Memo”), at 17 et seq.). POL § 87(2)(d) exempts from disclosure only records or portions of

records that are “trade secrets or are submitted to an agency by a commercial enterprise or

derived from information obtained from a commercial enterprise and which if disclosed

would cause substantial injury to the competitive position of the subject enterprise.”

The term “trade secret” is not defined under FOIL, and so the New York courts have

generally followed Section 757 of the Restatement of Torts in determining whether

information is entitled to protection as a trade secret. Matter of Verizon N.Y., Inc. v New York

State Pub. Serv. Commn., 137 A.D.3d 66, 72 (2016). Here, Petitioners must establish that the

information is a “formula, pattern device or compilation of information which is used in

one’s business, and which gives [one] an opportunity to obtain an advantage over competitors

who do not know or use it.” If the information fits this general definition then the court must

make an additional factual determination to determine whether the alleged trade secret is

truly secret by consideration of six factors: (1) the extent to which the information is known

outside of the business; (2) the extent to which it is known by employees and others involved

in the business; (3) the extent of measures taken by the business to guard the secrecy of the

information; (4) the value of the information to the business and its competitors; (5) the

amount of effort or money expended by the business in developing the information; [and] (6)

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the ease or difficulty with which the information could be properly acquired or duplicated by

others.” Matter of Verizon N.Y., 137 A.D.3d at 72 (quoting Marietta Corp. v Fairhurst, 301

AD2d, 734, 738 (2003) (internal quotation marks, brackets and citation omitted). The entity

“seeking to establish the existence of a bona fide trade secret must make a sufficient showing

with respect of these factors”. Id.

For information that is not proven to be a trade secret, Petitioners, as the party

claiming the exemption applies, must show that the information “would cause substantial

injury to the competitive position of the subject enterprise.” FOIL does not define

competitive injury and the New York courts have looked to the federal courts’ interpretation

of the parallel exemption provided for in the Freedom of Information Act (“FOIA”). Encore

Coll. Bookstores v. Auxiliary serv. Corp. 87 N.Y.2d 410, 420 (1995). Whether “substantial

injury to competitive position of the subject enterprise” would result from disclosure of the

requested material “turns on the commercial value of the requested information to

competitors and the cost of acquiring it through other means.” Encore Coll., 87 N.Y.2d at

420. While actual competitive harm does not need to be established, a “likelihood of

substantial competitive injury” (emphasis added) does need to be shown. Encore Coll., 87

N.Y.2d at 421 (citing Gulf & W. Indus. v United States, 615 F.2d 527, 530 (D.C Cir. 1979).

Petitioners have not, and cannot, meet the burden of showing that this exemption

applies.

II. PETITIONERS HAVE NOT SHOWN THAT THE INFORMATION

REQUESTED IS A BONA FIDE TRADE SECRET

Petitioners claim three categories of alleged trade secrets: (1) financial strategies, (2)

compliance measures and documentation and (3) customer data. Ver. Pet. ¶ 16. In the first

category, Petitioners include their purported “non-public banking relationships” and their

“investment strategy” as to reinvestment of customer funds. Id. ¶¶ 17-21. In the second

category, Petitioners claim they have “industry leading compliance policies” that “do not

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write themselves” but rather are drafted by their “well-staffed and funded compliance teams”;

however, Petitioners say nothing more about these supposed compliance policies beyond

these vague, conclusory descriptions. Finally, Petitioners seek to withhold from disclosure

data about former customers who were terminated because they had a U.S. nexus, and with

whom Petitioners can no longer do business. Id. ¶¶ 26-27.

In their Petition, Petitioners do not even address the fact-specific factors that courts

must consider in determining whether information can be properly classified as trade secrets,

let alone make a showing sufficient “to establish the existence of a bona fide trade secret” as

to each of the three categories, or any particular documents they seek to protect. Matter of

Verizon, 137 A.D.3d at 73. Generalized statements that the information “is kept secret” (Ver.

Pet. Memo., at 17) and therefore “valuable in the hands of competitors” (id.) do not give rise

to a plausible allegation of a trade secret’s existence. See, e.g., Elsevier Inc. v. Doctor

Evidence, LLC, 2018 WL 557906, at *6 (S.D.N.Y. Jan. 23, 2018) (“[a]lleging the existence

of general categories of confidential information, without providing any details to generally

define the trade secrets at issue ... does not give rise to a plausible allegation of a trade

secret's existence.” (internal quotation marks and citation omitted).

For instance, and as discussed in more detail in the next section, although Petitioners

vaguely argue that their banking relationships are “non-public,” at the very least their largest

banking relationship, with Deltec Bank & Trust Limited in the Bahamas, is already public

knowledge. Chernin Aff., ¶ 22 and Ver. Pet. Ex. 23. More importantly, Petitioners make no

effort whatsoever to explain to what extent other banking relationships are known outside of

the companies, the extent to which employees know about these relationships, or the

measures taken by Petitioners to guard the secrecy of the information. The same is true of its

arguments about its investment strategies, compliance materials and former customer data.

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Indeed, Petitioners simply provide broad brush examples where information from

other cases have been found to be trade secrets without explaining in what way such

information is analagous to the information at issue here. For example, Petitioners provide an

example where yoga training manuals were found to be a trade secret in part because the

yoga studio “derived independent economic value” from the yoga training manuals. Art of

Living Foundation v. Does, No. 10–CV–05022, 2011 WL 2441898, at *12 (N.D. Cal. June 15,

2011). It is not clear how a yoga training manual is analogous to compliance manuals, much

less how Petitioners derive “independent economic value” from their compliance policies.

III. PETITIONERS HAVE FAILED TO SHOW THAT DISCLOSURE OF THE

INFORMATION WOULD LIKELY CAUSE SUBSTANTIAL COMPETITIVE
HARM

Petitioners also have failed to show that the Responsive Documents would cause

substantial competitive harm to Petitioners. Under the applicable legal standard a party

asserting the § 87(2)(d) exemption needs to show the likelihood of “substantial” competitive

injury (Gulf & W. Indus. v United States, 615 F.2d 527, 530 (D.C. Cir. 1979) by submitting

“specific, persuasive evidence” of such likelihood. Markowitz v. Serio, 893 N.Y. 3d 43, 51

(2008). Speculative conclusions and “conclusory opinion testimony” are not sufficient. Nat’l

Parks & Conservation Ass’n v. Kleppe, 547 F.2d 673, 679 (D.C. Cir. 1973). Rather than

even attempting to make this showing, Petitioners claim only that the information in question

would be “valuable” to competitors (Ver. Pet. Memo., at 21), but this falls far short of

showing that TOL would either lose a commercial advantage or likely suffer substantial harm

through the disclosure of this information pursuant to FOIL.

A. Petitioners have failed to show that release of the financial

information at issue would likely cause substantial harm

Petitioners argue that disclosing the composition of their asset reserves would destroy

their competitive advantages. Ver. Pet. Memo., at 20. However, other than their own

unsupported conclusions set out in the Verified Petition, the sole evidence Petitioners rely on

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to make this sweeping statement is the affidavit of Abe Chernin, who claims that if Tether’s

asset reserves were disclosed its “investment returns may suffer” and Tether would be subject

to the risk of other entities “reverse-engineer[ing] what future investments Tether is likely to

purchase and either bid up the prices of such investments, or purchase them before Tether

does and re-sell them to Tether at a higher price”. Chernin Aff. ¶ 15. Chernin claims that

such front-running behaviour is “well documented in academic literature on mutual funds and

portfolio disclosure.”

However, Chernin’s claims rest on a flawed comparison between hedge funds and

TOL. Id. ¶ 13. There is a fundamental difference between the two: hedge funds are

concerned with maximizing returns for their investors, whereas establishing the stability, in

all market conditions, of a stablecoin, is an entirely different model. Id. ¶ 14. The primary

purpose of Tethers, from the perspective of the users and the market, is not generating a

return (this is incidental at best) but providing a stable value. Id. ¶ 10. TOL holds itself out to

the market as such, as specifically acknowledged by its affiant. Chernin Aff. ¶ 4. Further, at

paragraph 12 of his affidavit, Mr. Chernin claims that TOL’s business model means that

Tethers have a ‘larger cushion’ of assets than other stablecoins, but based on TOL’s own

website as of the date of the Ali Affirmation, there is only a cushion of 0.21% ($0.162bn on

assets of $77.5bn). Ali Aff. ¶ 11.

This is in fact a razor-thin “cushion,” and would mean that only a 0.22% drop in value

would result in Tether no longer being fully backed. Id. Either the returns are not that

significant or TOL is not reinvesting its returns to bolster the asset’s stability, as claimed. Id.

Either way, the logic of Mr. Chernin’s argument is fundamentally flawed: it cannot

simultaneously be “an exotic investment with a secret investment strategy” and a stable asset.

Id. ¶ 17.

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Petitioners’ arguments that disclosure of Petitioners’ banks would cause substantial

harm also are illogical. Petitioner on the one hand claims that traditional banks are adverse to

establishing relationships with virtual currency businesses and that it took many years to

nurture such relationships. Ver. Pet. ¶¶ 18-19. On the other hand, Petitioner argues that if the

existence of the relationship with a bank was revealed these “carefully negotiated services”

and “years” of “cultivated relationships” could be easily replicated by competitors. Ver. Pet.,

¶ 19.

Moreover, as noted above, Petitioners are perfectly happy to disclose their key

banking relationship with Deltec Bank & Trust Limited (Chernin Aff., ¶ 22 and Ex. 23) – it is

not clear therefore why the other banking relationships should be afforded special status. The

disclosure of this banking relationship fundamentally undermines Petitioners’ argument that

disclosing the information on asset reserves would reveal their banking relationships and

subsequently place Petitioners at a competitive disadvantage.

B. Disclosure of compliance policies would not likely cause substantial

harm

As to internal compliance measures and documentation, Petitioner’s arguments are

again speculative. These policies purportedly detail how Petitioners remove and exclude

customers from their platform who violate the platform’s terms and conditions or other laws.

Ver. Pet. Memo., at 22. Petitioners claim they have designed these policies to “satisfy a

complex and multinational set of regulations and compliance obligations” and that its

competitors might “free-ride” off its policies to develop their own such policies. Ver. Pet.

¶ 25. Such an argument is the very definition of speculative as it assumes without supporting

evidence that Petitioners’ competitors (a) do not already have in place compliance policies of

their own; and (b) would wish to emulate Petitioners’ compliance policies, when Petitioners

themselves have fallen afoul of the law. Petitioners then aver, again completely devoid of any

evidence, that “bad actors” might use the compliance measures to “circumvent” Petitioners’

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procedures, thus increasing Petitioners’ exposure to reputational harm. Ver. Pet. ¶ 25; Ver.

Pet. Memo., at 22.

Both arguments are misplaced and misapply the law. The applicability of the

exemption does not turn on whether the information would potentially and hypothetically be

used by free “bad-actors” or “free-riders” but on the likelihood that the disclosure of the

information would cause substantial injury to Petitioners’ competitive position. Petitioners

offer no evidence, let alone specific and particularized evidence, as to how Petitioners would

lose a commercial advantage or likely suffer substantial harm due to its competitors knowing

how they have excluded customers from using their platforms. If anything, these security

measures presumably have been put in place to prevent trading by certain customers and as

such there is limited, if any, discernible commercial value of the information itself to either

Petitioners or to their competitors. This is far from adequate justification to apply the

exemption in this instance.

C. Petitioners have failed to show that the disclosure of former customer

data would likely cause substantial harm

Finally, Petitioners claim that the exemption should apply to prevent disclosure of

data on its former customers (Ver. Pet. ¶¶ 26-27; Ver. Pet. Memo., at 23) because their

competitors might use the information to solicit customers and gain insight into Petitioners’

customer base, which would “cause substantial competitive injury by providing a list of

available customers to competitors without the costs traditionally associated with retaining

customers”. This is nonsensical: these are former customers whom Petitioners were required

to remove from their platform under the Settlement Agreement and with whom Petitioners

are banned from trading. Answer, Ex. 1 ¶ 57(b)(1). Petitioners’ competitive position

cannot therefore be harmed by these customers joining other platforms as there is no market

in which Petitioners can compete for these customers. Consequently, no competitive injury is

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obviously likely to result from disclosure of its former customer lists, and Petitioners once

again have failed to give any credible evidence to show otherwise.

IV. PETITIONERS HAVE FAILED TO SHOW THAT THE PRIVACY

EXEMPTION APPLIES

Respondents determined that individual customers’ and institutional account numbers

should be redacted from the documents disclosed. CoinDesk agrees with this position.

Petitioners also seek to apply the privacy exemption under POL § 87(2)(b) to the names of

institutional former customers. Under POL § 87(2)(b) information is exempt if disclosure

would constitute an “unwarranted invasion of personal privacy” under POL § 89(2)(b), which

includes a list of six non-exclusive specific kinds of disclosure, none of which apply here. If

the disclosure does not fall under one of these six categories, to determine if disclosure would

be “unwarranted” the courts balance the privacy interests at stake against the public interest

in disclosure of the information. New York Times Co. v. City of New York Fire Dept.,

4 N.Y.3d 477, 485 (2005).

Petitioners’ feeble showing of harm falls short of carrying their heavy burden to

demonstrate that any significant invasion of privacy will occur. Petitioners’ arguments are

completely devoid of any adequate evidentiary support. First, Petitioners allege without

support that the disclosure of its former customers’ would result in “solicitation” by

competitors but gives no evidence as to how that constitutes an unwarranted invasion of

privacy as to those customers. Further, in arguing that their customers might be solicited

away from Petitioners, Petitioners appear more concerned with themselves than their

customers, the subjects of Section 87(2)(b) protection.

Petitioners again imagine shadowy bad actors’ such as “Bitfinex and Tether’s

detractors” who might use the information to improperly harass their customers. Who are

these bad actors? What is an “improper” harassment, and what is the evidence that such

harassment will occur and, if it does, would constitute an unwarranted invasion of privacy

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cognizable under the privacy exemption? Petitioners do not bother to explain. Accordingly,

how such a hypothetical proposition, made with no evidentiary support, constitutes sufficient

basis to warrant the application of an exemption to FOIL is anyone’s guess.

V. THE COURT MAY REVIEW THE REQUESTED DOCUMENTS IN CAMERA

Respondents argue in their papers that the Court is entitled to review all the

documents requested by CoinDesk’s FOIL request in camera, in order to confirm that

Respondents’ decision to produce such documents was correct. Although CoinDesk believes

that Petitioners have not met their burden of showing in the first instance that Respondents’

decision was incorrect, CoinDesk believes that any in camera review of the documents will

only further demonstrate that Respondents’ determination should not be disturbed.

VI. THE PUBLIC’S INTEREST IN DISCLOSURE FAR OUTWEIGHS ANY

INTEREST PETITIONERS MIGHT HAVE IN THE INFORMATION

Even if Petitioners had succeeded in demonstrating that the Responsive Documents

should be exempt from disclosure, the public’s interest in transparency far outweighs any

such consideration. FOIL is based on the “the premise that the public is vested with an

inherent right to know and that official secrecy is anathematic to our form of government.”

Matter of Fink v. Lefkowitz, 47 N.Y.2d 567, 571 (1979). It furthers New York’s “strong

commitment to open government and public accountability.” Capital Newspapers, 67 N.Y.2d

562, 565 (citations and internal quotation marks omitted). This strong policy extends to

documents submitted to or filed with government agencies by commercial entities. See, e.g.,

Markowitz, 893 N.Y. 3d 43 and Washington Post Co. v. New York State Ins. Dept. 61 N.Y.2d

557, 564 (1984).

All exemptions to FOIL are permissive, not mandatory. Capital Newspapers, 67

N.Y.2d 562, 567. POL § 87(2)(d) warrants a balancing of the private interest and the public

interest when considering whether an exemption applies. Specifically in relation to

competitive injury exemption cases under FOIA, the federal courts have recognised that this

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balancing act is essential, and a “court must balance the strong public interest in favor of

disclosure against the right of private businesses to protect sensitive information.” GC Micro

Corp. v. Defense Logistics Agency, 33 F.3d 1109, 1115 (9th Cir. 1994), citing National Parks

& Conservation Ass’n v. Morton, 498 F.2d 765, 768-69 (D.C. Cir. 1974).

TOL purports to pride itself on the fact that Tethers are backed sufficiently by its

reserves, demonstrated by its claims in the Verified Petition that this enables it to provide a

safe and secure trading platform for its customers. But, as made clear in the OAG’s findings

from its investigation, TOL has on multiple occasions made misleading statements to the

public about the extent to which Tethers were backed 1-1 by US dollars and/or other assets.

Answer, Ex. 16, see e.g. ¶¶ 8, 9, 29 and 43. As part of the Settlement Agreement, TOL

expressly agreed to provide the OAG and the public ongoing publication of the breakdown of

the reserves backing Tethers. Id. ¶ 57(f).

In a separate public announcement, (Hochstein Aff., Ex. G), TOL has claimed not

only that it agreed to make the reserve breakdown publicly available, but that it was the party

that proposed such disclosure. As noted above, however, the only information TOL released

to the public was insufficient to provide a complete picture of what actually makes up the

reserves. This incomplete public disclosure was the catalyst for CoinDesk’s Request.

Hochstein Aff. ¶ 15.

As explained by Petitioners, TOL has a “near monopoly on the stablecoin market”

(Ver. Pet. Memo., at 5) and a substantial portion of all Bitcoin trades in the world are

underpinned by Tethers. Koonce Aff., Ex. G, at 13. Petitioners thus control one of the most

important components of the cryptocurrency ecosystem. Koonce Aff., Ex. G, at 31. Not only

the OAG, but multiple federal agencies have been reported to have expressed concern at the

threat Tethers pose to financial stability and that Tethers are obscuring transactions tied to

money laundering. Hochstein Aff., Ex. C. In the words of Attorney General James “Bitfinex

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and Tether recklessly and unlawfully covered-up massive financial losses to keep their

scheme going and protect their bottom lines” and “Tether’s claims that its virtual currency

was fully backed by U.S. dollars at all times was a lie. These companies obscured the true

risk investors faced and were operated by unlicensed and unregulated individuals and entities

dealing in the darkest corners of the financial system.” Hochstein Aff., Ex. F. The U.S.

Department of Justice has taken this even further and is reportedly investigating whether

executives at TOL have committed bank fraud. Koonce Aff., Ex. C.

Petitioners’ lack of transparency and misleading statements to the public show their

lack of respect for the public and their own customers, apparently believing themselves

immune from public accountability (the very purpose for which FOIL was enacted).

Petitioners should not be allowed to avoid such accountability or continue to hide in the

‘darkest corners’ of the financial system behind spurious and speculative claims of “trade

secret” and/or “substantial competitive injury” in connection with the very information about

which they have repeatedly promised to be transparent.

The documents requested would highlight in a manner unavailable by other means the

trustworthiness and liquidity of the Tether product, by allowing the public to properly assess

the claims to stability TOL makes. Ali Aff. ¶ 17. As such, the public’s interest in the

Responsive Documents and any other documents responsive to the request substantially

outweighs the commercial or competitive interest Petitioners might have in such information

(if any).

CONCLUSION

For the foregoing reasons, the Court should deny Petitioners’ application for relief

and dismiss the Petition with prejudice.

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Dated: New York, New York Respectfully submitted,

January 4, 2022

KLARIS LAW, PLLC

By: /s/ Lacy H. Koonce III

Olivia Hayes Franklin
29 Little West 12th Street
New York, New York 10014
+1 917-774-7595
Olivia.franklin@klarislaw.com
Lacy H. Koonce III
29 Little West 12th Street
New York, New York 10014
+1 917-612-5861
Lance.koonce@klarislaw.com

Counsel for Intervenor Respondent

CoinDesk

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SECTION 202.8-b CERTIFICATION

I am the attorney who is filing this document. I hereby certify that this document,

exclusive of the caption, table of contents, table of authorities, and signature block contains

6,780 words as counted by the word-processing system used to prepare the document.

/s/ Lacy H. Koonce III

Lacy H. Koonce, III

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