The US District Court rules in favor of the SEC against Terraform Labs, pending a jury trial on fraud allegations and nuanced judgments.
Terraform Labs and its erstwhile CEO, Do Kwon, have been found liable in favor of the Securities and Exchange Commission (SEC) by the United States District Court.
The ruling above, rendered by District Court Judge Jed Rakoff, reaches the conclusion that the aforementioned entities engaged in the solicitation and distribution of unregistered securities, with a specific focus on the cryptocurrencies LUNA and MIR.
Mixed Verdict on Security-Based Swaps
Nevertheless, the court offered a nuanced perspective regarding security-based exchanges. The appellants were awarded a favorable judgment concerning these swaps’ unregistered offer and sale.
The primary emphasis was on Terraform’s Mirror Protocol, which enabled participants to create “mAssets” by replicating physical assets on the blockchain. The court reached the contrary conclusion that these mAssets did not meet the legal definition of security-based exchanges, as opposed to the SEC’s decision.
Application of the Howey Test
In determining the nature of the investments, the ruling relied primarily on the Howey test. The court took into consideration a prior statement made by Kwon, which suggested that LUNA investors were, in essence, investing in a joint venture between Terraform Labs and Kwon, with the anticipation of financial gains.
Similarly, the court assessed the MIR token using identical standards. It determined that it meets the Howey test because of the anticipated financial gains resulting from Terraform’s development endeavors.
Expert Testimonies: A Decisive Element
Another pivotal element of the case pertained to the court’s position regarding expert testimony. Simultaneously, the petition filed by the SEC to exclude the testimony of Dr. Terrence Hendershott, a defense expert, was denied.
Nevertheless, the court granted permission for the testimony of two SEC experts, Dr. Bruce Mizrach and Dr. Matthew Edman, strengthening the SEC’s stance in the litigation.
SEC’s Fraud Claims Pending Trial
Notwithstanding these decisions, the court declined to award summary judgment in favor of either party regarding the SEC’s fraud allegations against Terraform Labs and Kwon.
A jury trial is scheduled to hear these allegations, pertain to a purportedly fraudulent cryptocurrency scheme that expunged more than $40 billion in market value in 2022. The jury selection, planned for January 24, 2024, signifies the upcoming stage in this prominent legal dispute.
This ruling holds considerable importance in the continuous examination and regulatory endeavors of blockchain enterprises and cryptocurrencies. In this swiftly evolving field, the outcome of the pending jury trial will be closely monitored, as it could establish precedents for future cases.