In the most recent developments in the ongoing case between Terraform Labs and the United States Securities and Exchange Commission (SEC), a U.S. federal judge decided on Monday that the crypto firm and its founder, Do Kwon, will continue to face fraud allegations.
Terraform Labs and Do Kwon, creators of two cryptocurrencies that had significant impacts on the global crypto market last year, had their motion to dismiss these allegations denied by U.S. District Judge Jed Rakoff in Manhattan. Despite Terraform Labs’ firm stance to contest the “misguided and deeply flawed” allegations made by the SEC, the court has ruled that the case can advance.
The digital assets in question, TerraUSD (also known as UST) and Luna, once carried considerable value within the crypto market. Prior to its downfall, TerraUSD, an algorithmic stablecoin designed to uphold a 1:1 peg with the U.S. dollar, held a market cap exceeding $18.5 billion, making it the 10th largest cryptocurrency. However, the value of UST was intimately tied to Luna, another token, and when the former slipped below its intended peg, both lost nearly all their worth.
The SEC asserts that Terraform Labs and Kwon misrepresented the stability of UST to investors and falsely claimed that the company’s crypto tokens would appreciate in value. In accordance with Judge Rakoff’s decision, these allegations will proceed.
Judge Rakoff rejects Ripple Labs case approach, denies Terraform’s major questions doctrine argument
In an interesting twist, Judge Rakoff disagreed with the approach taken by U.S. District Judge Analisa Torres in the recent Ripple Labs case. In that particular ruling, it was determined that Ripple’s XRP sales on public cryptocurrency exchanges were not securities offerings, as buyers did not know whether their funds were directed to Ripple or a third party. Judge Rakoff rejected this logic in the Terraform Labs case, stating that the seller’s identity holds no bearing on how a reasonable investor would interpret statements from Kwon and his company as a “promise of profits based on their efforts.”
Terraform Labs, in an attempt to have the SEC’s case against them dismissed, cited the recent split decision in the SEC’s case against Ripple Labs and the major questions doctrine – an argument positing that regulatory agencies cannot exercise control in areas of major economic or political significance without congressional input. However, these were also dismissed by Judge Rakoff.
In his decision, Judge Rakoff deemed that the cryptocurrency industry, despite its importance, does not bear sufficient economic and political significance to invoke the major questions doctrine. He also pointed out that constraining the SEC’s regulatory powers to only investment products explicitly labeled as securities would contradict Congress’s intent when enacting the current securities laws.
In a minor victory for Terraform Labs, a federal bankruptcy judge approved a subpoena of FTX wallets and account information in relation to potential short sellers of Terra/Luna. Terraform claims this information, which FTX lawyers have agreed to provide, will assist in their defense against an SEC allegation of conspiracy with Jump Trading to manipulate the price of UST in 2021.