A U.S. federal judge recently delivered a ruling in favor of the U.S. Securities and Exchange Commission (SEC) concerning allegations directed at Terraform Labs and its former CEO Do Kwon for issuing and vending two unregistered securities.
District Court Judge Jed Rakoff, in a filing dated December 28, stated that the court granted summary judgment favoring the SEC’s claims against Terraform Labs and Kwon for offering and selling LUNA, UST, and MIR unregistered securities. However, the judge also granted summary judgment in favor of the defendants regarding the alleged unregistered securities swap offer and sale.
The SEC contended that Kwon and Terraform Labs facilitated security-based swap transactions by establishing and maintaining a mirror protocol for minting “mAssets.” Nevertheless, the court dismissed this argument, determining that mAssets did not align with the statutory definition of a security-based swap.
Describing mAssets as blockchain assets mirroring real-world assets by reflecting transaction prices on-chain, the court referenced Kwon’s previous statements to affirm that LUNA satisfied the Howey test. According to the court, investors could participate in a joint enterprise, expecting profits solely from Terraform and Kwon's efforts.
Regarding the MIR token, the court ruled that the defendants couldn't effectively dispute that they led MIR holders to anticipate profits from Terraform's actions in developing, maintaining, and expanding the Mirror Protocol, thereby satisfying the Howey test.
The court also addressed the exclusion of expert testimonies, allowing SEC experts Dr. Bruce Mizrach and Dr. Matthew Edman to testify but rejecting a motion to exclude defense expert Dr. Terrence Hendershot. The SEC alleges Kwon orchestrated a fraudulent cryptocurrency scheme causing significant market capitalization losses in 2022, leading to a jury trial scheduled to begin in January, starting with jury selection on January 24, 2024. Terraform Labs stated their disagreement with the court's ruling and readiness to vigorously challenge the SEC's fraud allegations at trial, emphasizing their stance against the classification of UST and related tokens as securities and disputing the basis of the SEC's fraud charges.
