In a definitive ruling, U.S. District Judge Jed Rakoff favored the Securities and Exchange Commission (SEC) in the multi-billion-dollar fraud case involving Terraform Labs and its founder, Do Kwon. Rakoff noted that the Howey test criteria were satisfied for a range of Terra-related assets and additionally stated that there is “no genuine dispute that UST, LUNA, WLUNA, and MIR are securities because they are investment contracts.”
Judge Determines Terra-Related Crypto Assets Are Securities, Satisfying Howey Test
Nine months after the Terra blockchain’s implosion, the U.S. securities regulator charged Terraform Labs and its CEO, Do Hyeong Kwon, with fraud. The SEC accused Terraform Labs and Kwon of orchestrating a vast fraud involving the sale of various crypto assets, including unregistered securities and deceptive security-based swaps.
Central to the controversy was the SEC’s claim that Terraform’s UST crypto asset was falsely marketed as being pegged to $1 through a self-stabilizing algorithm, hiding the reality of third-party intervention. Additionally, Terraform was accused of falsely claiming a Korean mobile payment application, Chai, processed transactions using its blockchain, a claim later reportedly found to be replicated and not genuine.
Both parties presented expert witnesses to bolster their cases. The SEC’s experts, Dr. Bruce Mizrach and Dr. Matthew Edman, faced the defendants’ experts including Dr. Terrence Hendershott, Mr. Raj Unny, and Dr. Christine Parlour. After a comprehensive Daubert hearing, the court rejected the defendants’ experts, Mr. Unny and Dr. Parlour, but allowed Dr. Mizrach and Dr. Edman to testify. Judge Rakoff provided a clear verdict, granting summary judgment in favor of the SEC on the critical issue of unregistered securities offered and sold by the defendants.
Rakoff, however, granted judgment for the defendants on transactions involving unregistered security-based swaps, leaving a nuanced perspective of the situation. To some, Rakoff’s decision signifies a pivotal juncture at the crossroads of legal frameworks and cryptocurrency. The announcement comes after the SEC and the involved parties settled on confidential submissions. Rakoff sanctioned the protective order, thereby classifying certain documents in the legal action as confidential.
What do you think Rakoff’s decision in the SEC case against Terraform Labs and Do Kwon? Share your thoughts and opinions about this subject in the comments section below.