Yeah, technically correct I guess. Is there any realistic scenario where this would fly? This would be plain and clear fraud and not something allowed to go on for two years after multiple audits.

The NYAG said they were liars who had comitted multiple acts of fraud and fined them.

There have been precisely 0 (zero, none) completed audits of Tether's holdings

What audits? The point is that there hasn’t been anything like an actual audit.

This is likely very similar to how USDT works.

So the answer to your question is it would happen in crypto where there is no regulator and people trust ‘audits’ which verify nothing.