Judge sides with US SEC, says Terraform Labs crypto founder Do Kwon violated law

Judge sides with US SEC, says Terraform Labs crypto founder Do Kwon broke law

NEW YORK, Dec 28 (Reuters) – A federal judge decided on Thursday that cryptocurrency entrepreneur Do Kwon and his company Terraform Labs violated U.S. law by failing to register two digital currencies that collapsed in 2022.

U.S. District Judge Jed Rakoff in Manhattan sided with the Securities and Exchange Commission in its case coming from the implosion of the TerraUSD and Luna currencies.

Rakoff also denied summary judgment to both sides on the SEC’s fraud claims, which will continue toward a scheduled Jan. 29, 2024 trial. He rejected SEC claims that the defendants illegally offered security-based swaps.

A Terraform spokesman said the company strongly disagreed with the decision, did not think its tokens were securities, and would continue defending against the SEC’s “meritless” fraud claims at trial.

The SEC had no immediate response.

Kwon, a South Korea native, has also been charged with fraud by U.S. officials in Manhattan.

He has been fighting return to the United States from Montenegro, where he was arrested in March several hours before the criminal fraud charges were announced.

Kwon had created TerraUSD, a “stablecoin” meant to maintain a constant $1 price, and Luna, a more traditional token whose value fluctuated but was closely linked to TerraUSD.

Both cryptocurrencies lost an estimated $40 billion or more when TerraUSD proved unable in May 2022 to keep its $1 peg.

Their decline also dragged down the value of other cryptocurrencies, including bitcoin.

The SEC claimed that four of the defendants’ crypto assets, including TerraUSD and Luna, were unregistered securities because they qualified as “investment contracts.”

It also accused Terraform and Kwon of repeatedly misleading investors about the stability of TerraUSD, including by saying that their cryptocurrencies would grow in value.

‘NO GENUINE DISPUTE’

The Court decided in that case, SEC v WJ Howey Co, that an investment of money in a common business, with profits to come solely from others’ efforts, was an investment contract.

But the judge also said reasonable jurors could disagree over whether the defendants meant to defraud investors in multiple statements about Terraform’s business.

These included statements about TerraUSD’s temporary May 2021 failure to keep its $1 peg, and how a popular Korean mobile payment app used the Terraform blockchain to settle transactions and supported Luna’s value.

Rakoff said the SEC’s remedies for the sale of unregistered securities would be decided once the defendants’ liability on the fraud claims has been settled.

The cryptocurrency business has fiercely denied that its tokens count as securities.

It won a victory in July when another judge on the Manhattan federal court said some tokens sold by Ripple Labs did not count as securities, because purchasers did not know if their money went to Ripple or third parties.

The case is SEC v Terraform Labs Pte Ltd et al, U.S. District Court, Southern District of New York, No. 23-01346.

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