The US Securities and Exchange Commission (SEC) has won a big case against TerraForm Labs (Terra) and its founder, Do Kwon.
A court order from yesterday states that Judge Jed Rakoff found Terra and Do Kwon guilty of breaking federal laws. They were accused of selling two securities, TerraUSD (UST) and LUNA, without proper registration.
SEC Allegations Against Terra Following Ecosystem Collapse
In the aftermath of the Terra ecosystem’s dramatic downfall, resulting in a loss of over $40 billion last year, the U.S. Securities and Exchange Commission (SEC) filed a lawsuit in February 2023. The SEC contends that Terra engaged in the offering and sale of four crypto assets, categorizing them as unregistered securities.
Additionally, the SEC accuses Terra of conducting transactions in security-based swaps through the Mirror Protocol. This protocol facilitates the creation of mAssets, blockchain-based assets mirroring real-world assets using on-chain exchange prices.
On a more serious note, the commission has brought fraud charges against Terra and its founder. The SEC alleges that both were involved in orchestrating a fraudulent scheme, further complicating the legal challenges faced by the beleaguered blockchain company.
Judge Rules on SEC Case Against Terra: Mixed Verdict and Trial Ahead
In a comprehensive 71-page summary judgment released recently, Judge Rakoff sided with the U.S. Securities and Exchange Commission (SEC) regarding the status of LUNA and UST as unregistered securities. The judge pointed to a previous statement from Terra’s founder, Do Kwon, where he urged LUNA investors to “sit back and watch him kick a**,” suggesting a common enterprise for profit based on Terra’s efforts.
While this decision is a partial victory for the defendants, as the judge rejected SEC claims of illegal offering and selling of security-based swaps, it’s not a complete win. The judge also denied the summary judgment on fraud claims, scheduling a jury trial for the fraudulent charges next month.
Judge Rakoff made additional rulings, refusing to exclude testimonies from SEC experts Dr. Matthew Edman and Dr. Bruce Mizrach, as well as Terra’s expert Dr. Terrence Hendershott. The court plans to address remedies after the upcoming trial.
Post-decision, a Terra spokesperson expressed disagreement with the verdict, emphasizing the company’s commitment to defending against the SEC’s fraudulent claims at the trial. However, the spokesperson didn’t clarify whether the company intends to appeal other aspects of the summary judgment decision.
Terra Decision Impact on SEC’s Crypto Enforcement Strategy
The recent judgment against Terra has potential implications for the SEC’s crypto industry enforcement efforts. This situation draws parallels with the SEC’s setback in July against Ripple, where XRP was deemed not a security by a New York federal judge.
Despite Terra attempting to leverage the Ripple ruling in its defense, Judge Rakoff rejected this argument, fueling speculation among legal experts. Many anticipated a summary judgment favoring the SEC, signaling the regulator’s enforcement agenda.
Ironically, the court’s decision now provides the SEC with a tool to advance its regulatory initiatives in the crypto space. Charging Terra with offering unregistered securities, the SEC has already classified other crypto assets like ADA and SOL as securities.
This verdict could pave the way for the SEC to label additional tokens as securities in the future, citing the Terra ruling to reinforce its position in ongoing regulatory actions.
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