Tether is on fire, but not in a good way (via Shutterstock).

The owners of Bitfinex and Tether have won a battle in their fight against New York State Attorney General Letitia James, but may be losing the war.

On May 16, New York State Supreme Court Judge Joel Cohen modified an injunction granted to James that froze the ability of stablecoin issuer Tether from loaning any more money to its sister company, cryptocurrency exchange Bitfinex.

That injunction was updated to have a 90-day time limit, and to clarify that while Tether cannot funnel money to company insiders, it can use its funds to pay salaries and vendors.

In a statement, Bitfinex called the ruling, “a victory in the ongoing defence of our business against the New York Attorney General’s office.”

But, Tether’s ability to loan Bitfinex any more money also remains frozen, and all the judge did in limiting the order to 90 days is make the Attorney General’s office reapply for the injunction once a quarter if they want to keep investigating.

The court also found that the Attorney General’s claim that the two companies may have violated securities law when Tether secretly loaned Bitfinex $625 million after extending a $900 million line of credit had “a likelihood of success on the merits.”

The loan came after Bitfinex lost $850 million dollars to alleged bank fraud in late 2018, making it unable to cover customer withdrawals. Tether then extended the loan out of the U.S. dollar reserves it maintains to back its stablecoins. Both companies are owned by iFinex, and James’ office claims that the loan was a conflict of interest, fraud, and violated the Martin Act, which regulates “the purchase, exchange, investment advice or sale of securities or commodities.”

Cohen noted that the Attorney General’s office continues to question “the propriety of the transaction itself, which it sees as an inherent conflict of interest between the same small cadre of Bitfinex and Tether principals. Moreover… [Bitfinex and Tether] did not disclose these cash transfers to investors.”

What Tether did was change the language on its website in March. Instead of every tether being “backed 1-to-1 by traditional currency held in our reserves,” the site now reads that its reserves “may include other assets and receivables from loans made by Tether to third parties, which may include affiliated entities.” Which is not quite the same thing as saying, “we loaned our sister company well over half a billion dollars.”

Bitfinex ran into trouble when Crypto Capital Corp, a payment processor it was using for dollar transactions after losing access to mainstream U.S. banks, was allegedly defrauded of $850 million by Arizona businessman Reginald Fowler, who once attempted to buy the Minnesota Vikings. The Attorney General fears the money is lost, while Bitfinex said it has been seized by the governments of the U.S., Portugal, and Poland, and expects its recovery soon.

Earlier this week, Bitfinex announced that it had successfully raised $1 billion in a private sale of newly created exchange tokens. The UNUS SED LEO tokens were purchased for bitcoin (BTC), tether (USDT) and U.S. dollars, the company said in a Medium post today. Bitfinex will list the LEO tokens beginning Monday, May 20. They will be tradable for dollars, bitcoin, tether, EOS, and ether (ETH).

Cohen ruled that while James’ claims of fraud and deceptive practices were not yet proven, “the petition and supporting materials provide a sufficient showing that [Bitfinex and Tether’s] proposed transaction may undermine representations regarding tether [USDT] upon which investors and traders rely.”

Moreover, James’ office has argued that USDT holders may suffer “irreparable injury” if Tether continues to ship dollars to Bitfinex without “adequate security or ability to repay,” Cohen noted. This could include “undermining public perception of tether as a stablecoin.”

As a result, Cohen said, the preliminary injunction would remain largely in place while the investigation continues.

The court also noted that James’ office is investigating the relationship between Bitfinex and Tether, which share executives as well as ownership by iFinex. The investigation is looking into Bitfinex’s ongoing ability to process withdrawals, and “the manner in which [Bitfinex and Tether’s] senior executives are compensated.”

In addition, the court upheld the part of the injunction ordering Bitfinex and Tether to preserve and turn over evidence, noting that the Attorney General’s office said it believes the companies “have not fully complied with its requests” for information.

Bitfinex and Tether, for their part, have responded with fury, accusing James’ office of acting in bad faith by seeking the injunction without notice, despite the companies having voluntarily and proactively informed them of the line of credit and loan.

The companies’ lawyers have argued that the loan and line of credit was “negotiated on an arm’s length basis on commercially reasonable terms, with each company represented by sophisticated, independent counsel,” Cohen noted. They added that “the Attorney General has no authority to dictate how Bitfinex and Tether do business with one another, or the amount of reserves that Tether must hold,” Cohen said.