A federal judge in the United States has sided with the Securities and Exchange Commission (SEC) in a case against Terraform Labs and its former CEO, Do Kwon. The judge granted summary judgement in favour of the SEC, asserting that Terraform Labs and Kwon offered and sold two unregistered securities—LUNA, UST, and MIR. However, the court did grant summary judgement for the defendants concerning the alleged unregistered offer and sale of security-based swaps.
The SEC contended that Kwon and Terraform Labs offered security-based swaps by creating and maintaining the Mirror Protocol, enabling the minting of “mAssets.” The court rejected this argument, ruling that mAssets did not meet the statutory definition of a security-based swap. M-Assets function as blockchain assets mirroring real-world assets by reflecting on-chain exchange prices.
The court referenced a previous statement from Kwon, where he mentioned that LUNA holders only needed to “[s]it back and watch [him] kick ass,” concluding that LUNA satisfied the Howey test. This implies that investors could put their money in a common enterprise and expect profits solely from the efforts of Terraform and Kwon.
Regarding the MIR token, the court determined that the defendants could not dispute that they led MIR holders to expect profits from a common enterprise based on Terraform’s efforts to develop, maintain, and grow the Mirror Protocol. The court affirmed that MIR passed the Howey test.
Additionally, the court rejected Terraform Labs and Kwon’s motion to exclude the testimony of two SEC experts, Dr. Bruce Mizrach and Dr. Matthew Edman. However, it also denied the SEC’s motion to exclude the testimony of defence expert Dr. Terrence Hendershott.
The SEC alleges that Kwon orchestrated a fraudulent cryptocurrency scheme that resulted in a market value loss of at least $40 billion in 2022. Both sides’ motions for summary judgement on the SEC’s fraud claims were denied, and a jury trial is set to begin in January 2024, with jury selection scheduled for January 24, 2024.
A spokesperson for Terraform Labs expressed disagreement with the court’s ruling and stated their intention to vigorously defend against the SEC’s fraud claims at trial. The spokesperson asserted that they do not believe the UST stablecoin or the other tokens in question qualify as securities, and the SEC’s fraud claims lack evidentiary support.