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SEC Notches Major Win In Terra Case As Judge Rules LUNA, UST Are Securities

A federal judge ruled Thursday in favour of the U.S. Securities and Exchange Commission (SEC), finding that Terraform Labs and its founder, Do Kwon, offered and sold unregistered crypto securities in the form of LUNA and UST.

Investment Contracts

A New York judge sided with the Securities and Exchange Commission in its claim that Terraform Labs, creator of the disastrous Terra and Luna cryptocurrencies, and its former CEO Do Kwon illegally sold unregistered securities — in a major victory for the regulator.

Judge Jed Rakoff of the U.S. District Court Southern District of New York granted the SEC’s summary judgment on that claim in a Dec. 28 filing. Judge Rakoff, however, granted summary judgment for Terraform “on the claims involving offering and effecting transactions in security-based swaps”.

“There is no genuine dispute that UST, LUNA, wLUNA, and MIR are securities because they are investment contracts,” Rakoff declared. 

The court highlighted a previous statement by Kwon, stating that holders of the LUNA token simply needed to “sit back and watch [him] kick-ass” to conclude LUNA passed the infamous Howey test. Simply put, a person could invest their “money in a common enterprise” and be “led to expect profits solely from the efforts of the promoter or a third party,” namely, Terraform and Kwon himself, Judge Rakoff ruled.

If the case goes to trial, the jury will be tasked with determining other aspects of the securities fraud charges, such as whether Kwon misled customers regarding the security of Terraform’s financial products, including the algorithmic stablecoin UST— which de-pegged in a catastrophic event in May 2022.

At the time, the so-called algorithmic stablecoin intended to be worth exactly one U.S. dollar, collapsed to a few pennies in the span of two weeks alongside a 99% drop in its sister token LUNA, wiping out over $60 billion in investor wealth and thrusting the entire crypto market into an icy winter.

The SEC, besides seeking to classify Terraform’s cryptocurrencies as unregistered securities, has also claimed that Do Kwon orchestrated a scheme to deceive investors about the nature and safety of UST’s dollar peg. 

A jury civil trial for the remaining claims in the SEC lawsuit is expected to start on January 29, 2024.

Kwon’s defense lawyers moved to have the case thrown out, contending that the SEC had failed to prove that Terraform offered securities or engaged in any wrongdoing. The presiding judge was evidently unconvinced as he rejected the motion.

The imbroglio with the SEC is just one of several legal challenges currently plaguing Kwon. In March, New York prosecutors charged the fallen crypto mogul with eight criminal counts of fraud. That same day, Kwon was captured at an airport in Montenegro’s capital city of Podgorica after eluding charges in his homeland South Korea. 

At the moment, both the U.S. and South Korean authorities are jockeying to extradite him. Last week, an appellate court in Montenegro quashed Kwon’s extradition to the U.S.

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