The Securities and Exchange Commission (SEC) has won a partial victory in its lawsuit against Terraform Labs, which develops blockchain-based platforms and tokens. Judge Jed Rakoff in the U.S. District Court ruled on Thursday that Terraform Labs and its co-founder Do Hyeong Kwon violated securities laws by offering and selling unregistered digital tokens.
Judge Jed Rakoff granted summary judgment for the SEC on that issue, finding that Terraform’s tokens – UST, LUNA, wLUNA, and MIR – are securities because they are investment contracts. However, the judge also ruled in favor of Terraform on another issue involving the claims that it offered and effected transactions in security-based swaps without complying with the registration and reporting requirements of the securities laws.
The judge found that Terraform’s products, called “mAssets”, are not security-based swaps but rather synthetic tokens that track the price of real-world assets, such as U.S. company stocks. The judge said that mAssets do not involve the actual delivery or exchange of the underlying securities and, therefore, do not fall under the definition of security-based swaps.
Terraform Accused Of Massive Crypto Fraud
The judge also denied motions from both parties for a summary judgment on the fraud claims, which allege that Terraform and Kwon engaged in a “multi-billion dollar crypto asset securities fraud” by making false statements to investors and the public about their products and platforms. The judge said that there are disputed issues of fact and credibility that need to be resolved by a jury.
The SEC filed its lawsuit against Terraform and Kwon in February, accusing them of orchestrating a scheme to raise billions of dollars from investors by offering and selling an inter-connected suite of crypto asset securities, with many transactions being unregistered.
The SEC said that the defendant’s flagship product, Terra USD, was an algorithmic stablecoin that was supposed to maintain a stable value of one U.S. dollar but collapsed in May last year, wiping out billions of dollars of investors’ money. Terra USD was linked to Luna, a governance token that was used to stabilize the price of Terra USD through market incentives and algorithms.
The SEC also said that Terraform created and sold other tokens, such as wLUNA and MIR, that were designed to provide exposure to various asset classes, such as stocks, commodities, and cryptocurrencies, through mAssets. The SEC aims for legal action, recovery of profits, and permanent bans on Terraform and Kwon. A jury trial for the remaining claims will start on Jan. 24, 2024.
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