Terraform Labs CEO against 2 subpoenas issued by the SEC in a recent lawsuit

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TL; DR Breakdown

  • Terraform Labs and its CEO challenged the Securities and Exchange Commission in a recent lawsuit.
  • The lawsuit argues the commission’s wrong approach in issuing two subpoenas to the company concerning its Mirror Protocol.

A recent lawsuit filed by Terraform Labs and its CEO and co-founder Do Kwon challenges the SEC’s issuance of two subpoenas to Kwon. The Securities and Exchange Commission earlier served the subpoenas in question during a Messari mainnet summit in mid-September. 

However, Do Kwon maintains that the public issuance of the subpoenas was against the commission’s regulations. The subpoenas demanded documents from Terraform and Do Kwon’s testimony as per its investigation. 

Terraform Labs is an innovative company based in South Korea, best known as the inventor of the Terra blockchain and Terra Luna coin. Notwithstanding, this is not the only platform under the company. It recently launched Mirror protocol, a platform dedicated to synthetic assets, allowing non-US parties to invest in US-based equities. 

The SEC- Terraform Labs saga

The commission began its pursuit for Terraform Labs in May, insisting on its cooperation during the process. The SEC was against the company’s Mirror Protocol, suspecting its breach of set regulation in the US. The investigation dubbed as Ín the Matter of Mirror Protocol required Kwon’s input as far as the protocol was concerned.

The SEC required Terraform’s voluntary contribution to the case as it could not yet serve the company a subpoena. In turn, the company appointed Dentos US LLP to represent it in all proceedings with SEC’s lawyers. The firm acted as an intermediary between the commission and the South Korean company.

Dentos came to an agreement with the commission concerning an interview with Mr. Kwon. It settled that the commission would not use anything said during the interview for the case. 

Mr. Kwon participated in the interview in early July, confirming in the lawsuit that it was estimated 5 hours long. Later, the commission’s attorneys requested necessary documentation from Mr. Kwon. However, it failed to provide an explicit request on what documents Mr. Kwon needed to produce. Dentos ensured that there was communication to establish the grounds of an achievable request from the SEC. 

Events leading to the lawsuit

Among the earlier requests by Dentos’ lawyers was the SEC to explain its view on Terraform Labs, the Mirror Protocol, and where it thought the company was lacking. In Terraform’s opinion, the SEC misunderstood the whole purpose and running mechanism of the Mirror Protocol. The lawsuit further highlights the commission’s reluctance as far as the request was concerned.

In September, the SEC hired Cavalier Courier and Process Services to deliver two subpoenas to Mr. Kwon during the Messari crypto summit in New York. The lawsuit explains that the server issued the subpoenas as Mr. Kwon exited an elevator after the summit. 

According to the lawsuit’s argument, the SEC violated their regulations, including the Due Process Clause. As a result, Terraform Labs is urging the court to disregard the SEC’s subpoenas. 

Furthermore, it demanded that the SEC prove that its subpoena issuance followed the Rule of Practice 150 (b). The commission should have also kept the investigation proceedings confidential as per its rules. 

As it stands, the commission is yet to release such information. The lawsuit might favor the company and Mr. Kwon in the long run. 

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