Things aren’t looking suitable for the former CEO of Terraform Labs Do Kwon after a United States Federal judge passed a ruling in which he stated the United States Securities and Exchange Commission, the SEC, has a valid claim against him.
The claim in question is the offering and selling of two unregistered securities. More specifically, the SEC is blaming Kwon for formulating a plan that defrauded billions of dollars of investors by developing, marketing, and selling various cryptocurrencies. At least, that is what the court documents say.
District court Judge Jed Rakoff stated in a December 28, 2023 filing that the court is granting a summary judgment in favor of SEC.
He believes there is sufficient substance to SEC claims where they alleged that Do Kwon and Terraform labs warrant blame for offering and selling LUNA, TerraUSD (UST), and Mirror (MIR) as unregistered securities.
Do Kwon, however, got some reprieve as Judge Rakoff granted summary judgment in favor of the defendant, where he was cleared of offering and selling unregistered security-based swaps.
After considering the evidence or legal arguments, the judge determined that there was no genuine dispute on this particular aspect of the case.
The SEC claimed that Do Kwon and Terraform Labs establish the Mirror Protocol to allow others to generate mAssets, enabling them to engage in security-based swap transactions.
However, the court determined that this argument cannot be entertained because mAssets doesn’t satisfy the legal definition of a security-based swap according to the relevant statutes; therefore, Do Kwon cannot be held liable for these claims.
M-Assets are digital assets on the blockchain designed to emulate real-world assets by mirroring the prices observed in on-chain exchanges.
The court referred to a prior statement by Do Kwon, where he mentioned that LUNA holders needed to “sit back and watch him kick ass.” The statement played a crucial role in the court’s application of the Howey test, a legal criterion used to identify transactions subject to securities regulations.
According to the Howey test, an investment contract involves 1) an investment of money, 2) a joint enterprise, and 3) an expectation of profits primarily from the efforts of others.
The court concluded that Kwon’s statement indicated LUNA met these criteria, suggesting that investors expected profits mainly from the efforts of Do Kwon and Terraform Labs, which is why they pooled their money in the LUNA ecosystem.
The interpretation aligned with the Howey test, supporting the argument that LUNA transactions could be considered investment contracts subject to securities regulations.
But things started to get worse from here for Do Kwon. Concerning the MIR token, the court determined that the defendants could not substantially challenge the assertion that they guided MIR holders to anticipate profits arising from a shared enterprise rooted in Terraform’s endeavors to build, sustain, and expand the Mirror Protocol.
To put it differently, the court stated that MIR convincingly satisfies the Howey test, emphasizing the token’s apparent alignment with the legal criteria for identifying investment contracts.
In simpler terms, the court is saying that it is clear that MIR holders were led to believe they would make money because of the collective efforts of Terraform Labs and the development of the Mirror Protocol.
There was a mention of the Howey test with flying colors, indicating that, in the court’s view, MIR easily meets the legal criteria used to determine whether something is an investment contract subject to securities regulations.
Two other motions were denied, one in favor of Do Kwon and the other in favor of SEC. The SEC rejected the motion to exclude the testimony of defense expert Terrence Hendershott, which worked in favor of Terraform Labs and Do Kwon. However, the court also denied the motion to dismiss the testimonies of two of the SEC experts, Bruce Mirzach and Mathew Edman, which worked in the favor of the SEC.
The SEC asserted in its lawsuit that Do Kwon orchestrated a fraudulent cryptocurrency scheme, resulting in the loss of at least $40 billion in market value in 2022.
Nevertheless, the court rejected motions from both parties seeking a summary judgment on the SEC’s fraud allegations.
Summary judgment is a legal procedure in which a judge decides a case without a full trial. It is granted when the court determines that there are no genuine disputes over crucial facts of the case, and one party is entitled to judgment as a matter of law.
In other words, summary judgment is typically issued when the evidence and legal arguments are clear enough that there is no need for a trial to resolve the dispute.
The fraud claims will be addressed in a jury trial scheduled for January. The jury selection is slated for January 24, 2024.
A representative from Terraform Labs has refuted the SEC claims in an interview he gave to Cointelegraph. He stated the company vehemently denied any wrongdoing and completely disagreed with the court’s decision in favor of the SEC.
He also stated that the company is working aggressively to build a defense that will refute the claims, such as refusing to consider UST stablecoin and other involved tokens as securities. Furthermore, the company stated that the SEC’s allegations were baseless and lacked supporting evidence, and they will challenge these unfounded claims during the trial.
