The AG says Bitfinex lost access to funds it had transferred there after regular banks stopped handling its business and subsequently dipped into $900 million of Tether's cash reserves. According to the filing, Crypto Capital Corp. told Bitfinex the funds were "seized by governmental authorities in Portugal, Poland, and the United States" but the AG says Bitfinex doesn't believe that is true.
The concept of Tether is supposed to be that it's a cryptocurrency backed one-to-one by US dollars or possibly other assets, however as the Wall Street Journal points out, the lack of an updated public audit has fueled speculation about whether the $2 billion or so that it should have in reserves are actually there. According to the AG, Bitfinex has taken "at least" $700 million from Tether.
After the AG's statement came out, Bitfinex issued one of its own, saying that "The New York Attorney General's court filings were written in bad faith and are riddled with false assertions, including as to a purported $850 million "loss" at Crypto Capital. On the contrary, we have been informed that these Crypto Capital amounts are not lost but have been, in fact, seized and safeguarded." It claims Bitfinex and Tether are financially strong, "full stop" and said it will fight these actions.