New York judge grants SEC summary judgment over claim that Terraform sold unregistered securities

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  • Judge Jed Rakoff in the U.S. District Court for the Southern District of New York granted summary judgment for the SEC on that claim, while also siding with Terraform “on the claims involving offering and effecting transactions in security-based swaps,” according to an order filed on Thursday. 

A New York judge sided with the Securities and Exchange Commission in its claim that Terraform Labs and its co-founder Do Hyeong Kwon offered and sold unregistered securities. 

Judge Jed Rakoff in the U.S. District Court for the Southern District of New York granted summary judgment for the SEC on that claim, while also siding with Terraform "on the claims involving offering and effecting transactions in security-based swaps," according to an order filed on Thursday. 

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

The court denied motions from both sides for a summary judgment on fraud claims, which will now go to a jury, according to the filing. 

The SEC charged Terraform Labs and its CEO Do Kwon in February over its algorithmic stablecoin Terra USD, which collapsed in a dramatic fashion last year. The agency said Kwon and Terraform orchestrated a "multi-billion dollar crypto asset securities fraud" while also raising billions from investors by "offering and selling an inter-connected suite of crypto asset securities, many in unregistered transactions." That had included “mAssets,” which the SEC said earlier this year are security-based swaps designed to pay returns by mirroring the price of U.S. company stocks as well as the infamous Terra USD. 

Algorithmic stablecoins

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Algorithmic stablecoins, like Terra USD, use market incentives via algorithms to maintain a stable price. Terra was linked to Luna, a governance token, to keep the prices stable. Terra USD crashed in May, wiping out billions.  

A jury trial for remaining claims in the suit is set to begin on Jan. 24, 2024. 

"We strongly disagree with the decision and do not believe that the UST stablecoin or the other tokens at issue are securities," a Terraform Labs spokesperson said in an email to The Block. "Further, the SEC’s fraud claims are not supported by evidence, and we will continue to vigorously defend against those meritless allegations at trial."

(Updates with comment from Terraform Labs.)


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About Author

Sarah is a reporter at The Block covering policy, regulation and legal happenings. Before, Sarah was a reporter with CQ Legal writing about securities regulation, which is where she first started reporting on crypto. Sarah has also written for The Bond Buyer and American Banker, among other finance-related publications. She graduated from the University of Missouri and earned a degree in print and digital journalism. Sarah is based in Washington D.C., and is an avid coffee lover. You can follow her on Twitter @ForTheWynn.

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