In a recent development, a United States federal judge has handed down a ruling in favor of the Securities and Exchange Commission (SEC) in a case involving Terraform Labs and its former CEO, Do Kwon.
The court granted summary judgment in favor of the SEC, which had accused Terraform Labs and Kwon of offering and selling two unregistered securities, namely, LUNA, UST, and MIR.
District Court Judge Jed Rakoff issued his decision on December 28, stating that Terraform Labs and Kwon indeed offered and sold unregistered securities in the form of LUNA, UST, and MIR.
However, Judge Rakoff did grant summary judgment in favor of the defendants regarding the alleged unregistered offer and sale of security-based swaps.
The SEC had argued that Kwon and Terraform Labs offered and executed transactions in security-based swaps by creating and maintaining the Mirror Protocol, which allowed users to mint “mAssets.”
Nevertheless, the court rejected this claim, asserting that mAssets did not meet the statutory definition of a security-based swap.
M-Assets are blockchain assets that mirror real-world assets by reflecting on-chain exchange prices.
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The court referenced a prior statement made by Kwon, in which he encouraged LUNA holders to invest and expect profits solely from Terraform and himself.
This led the court to conclude that LUNA satisfied the Howey test, thus constituting a security.
Regarding the MIR token, the court similarly ruled in favor of the SEC, stating that the defendants could not dispute that MIR holders expected profits from a common enterprise based on Terraform’s efforts to develop and maintain the Mirror Protocol.
Despite these rulings, the court did not grant either side’s motion for summary judgment on the SEC’s fraud claims against Kwon, which alleged that he orchestrated a fraudulent cryptocurrency scheme resulting in a substantial market value loss of at least $40 billion in 2022.
The fraud claims will be the subject of a jury trial scheduled to commence in January, with jury selection set for January 24, 2024.
In response to the court’s decision, a spokesperson for Terraform Labs expressed disagreement and a commitment to vigorously defend against the SEC’s fraud claims in the upcoming trial.
They asserted that they do not believe the UST stablecoin or the other tokens in question should be classified as securities and that the SEC’s fraud allegations lack supporting evidence.
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