Court rules against Terraform Labs and Do Kwon in SEC case
A U.S. federal judge has ruled in favor of the Securities and Exchange Commission (SEC) in its case against Terraform Labs and its former CEO, Do Kwon, for offering and selling two unregistered securities. District Court Judge Jed Rakoff sided with the SEC regarding the collapse of the TerraUSD and Luna currencies in 2022.
The court found that Terraform Labs and Do Kwon offered and sold LUNA, TerraUSD (UST), and Mirror (MIR) as unregistered securities. However, Judge Rakoff granted summary judgment for the defendants on the allegation of unregistered offer and sale of security-based swaps. The SEC’s argument that the Mirror Protocol’s mAssets constituted security-based swaps was rejected by the court, ruling that mAssets do not meet the statutory definition.
Judge Rakoff’s decision focused on the Howey test, concluding that LUNA satisfied the criteria as an investment in a common enterprise with expectations of profits primarily from the efforts of the promoter or a third party. The court also ruled that MIR token holders were led to expect profits based on Terraform’s efforts to develop and maintain the Mirror Protocol.
The court denied motions by both Terraform Labs and Kwon to exclude testimony from two SEC experts and rejected the SEC’s motion to exclude testimony from a defense expert.
Terraform Labs and Do Kwon are also facing fraud claims, which will be decided in a jury trial scheduled to start in January 2024. Jury selection for the trial is set for January 24, 2024.
A Terraform Labs spokesperson said they disagree with the court’s ruling and would continue defending against the SEC’s “meritless” fraud claims.
Their argument primarily centers on the assertion that the SEC has failed to provide sufficient evidence to support its claims. The co-founders maintain that their cryptocurrencies, such as Terra Classic (LUNA), TerraClassicUSD (USTC), Mirror Protocol (MIR), and mirrored assets (mAssets), do not meet the criteria of securities, as alleged by the SEC.
Furthermore, Kwon and Terraform’s legal team claimed that the SEC was aware that some of its allegations were baseless, specifically referencing an accusation that they had secretly transferred millions of dollars into Swiss bank accounts for personal gain.
Do Kwon, a South Korean national, has been charged with fraud by U.S. prosecutors in Manhattan and is currently fighting extradition to the United States from Montenegro. The collapse of Terraform’s digital currencies wiped out billions of dollars in market value, leading to significant repercussions in the cryptocurrency market.
