The United States Securities and Exchange Commission (SEC) has secured a major victory in its legal tussle against TerraForm Labs (Terra) and its founder, Do Kwon.
According to a court order yesterday, U.S. District Judge Jed Rakoff ruled that Terra and its founder, Do Kwon, violated federal laws by offering and selling two unregistered securities, TerraUSD (UST) and LUNA.
SEC Sues Terra and Kwon
Following the collapse of the Terra ecosystem that wiped out over $40 billion last year, the SEC alleged in a February 2023 filing that the company offered and sold four crypto assets that constitute unregistered securities.
The SEC also alleged that Terra effected transactions in security-based swaps by maintaining the Mirror Protocol, a solution that enables users to mint mAssets. It bears mentioning that these blockchain-based assets mirror real-world assets using on-chain exchange prices.
Furthermore, the commission also leveled fraud charges against Terra and its founder, stating that the duo orchestrated a fraudulent scheme.
In a 71-page summary judgment released yesterday, Judge Rakoff sided with the SEC that LUNA and UST constitute unregistered securities.
The court’s decision on UST and LUNA’s securities status was backed by a previous comment from Kwon, who told LUNA investors to “sit back and watch him kick a**.”
– Advertisement –
According to Judge Rakoff, the statement implies that LUNA investors can invest their money in a common enterprise and expect profit based on Terra and its founder’s efforts.
In what is considered a partial victory for the defendants, the judge denied the SEC claims that Terra illegally offered and sold security-based swaps.
In addition, Judge Rakoff denied the parties’ motion for summary judgment regarding the fraud claims. Consequently, the fraudulent charges have been scheduled for a jury trial by next month.
Meanwhile, Judge Rakoff denied the defendant’s motion to exclude the testimonies of two SEC experts, Dr. Matthew Edman and Dr. Bruce Mizrach. Similarly, the court also denied the SEC’s motion to exclude one of Terra’s experts’ testimonies, Dr. Terrence Hendershott.
The court noted that it would address the remedies issue once the forthcoming trial had been resolved.
Following the ruling, a Terra spokesperson commented on the decision, stating that the company disagrees with the verdict and would do everything to defend the SEC’s fraudulent claims at trial.
However, the spokesperson did not indicate whether the company will appeal other parts of the summary judgment decision.
SEC Enforcement Agenda Receives Major Boosts
The Terra decision could further bolster the SEC’s enforcement agenda in the crypto industry. Recall that the regulator suffered a major defeat against Ripple in July when a New York federal judge declared that XRP is not a security.
At the time, Judge Rakoff denied Terra’s attempt to use the Ripple ruling as a defense to argue that its tokens do not constitute securities. The contradictory ruling sparked a major debate, with top securities lawyers speculating that the court would grant summary judgment in favor of the SEC.
Interestingly, the court handed the SEC a weapon to enable it to continue its regulation by enforcement agenda in the crypto space.
Since the SEC charged Terra with offering four assets as unregistered securities, the commission has also given the securities tag to various crypto assets, including ADA and SOL.
Notably, the SEC could label more tokens as securities in the future while citing the Terra ruling to support its claim.