Judge sides with SEC in Terraform case on securities sales question 

The judgment represents an SEC victory ahead of a formal trial


Tada Images/Shutterstock modified by Blockworks


Judge Jed Rakoff — the judge overseeing the US Securities and Exchange Commission’s case against Terraform Labs and former CEO Do Kwon — has granted a summary judgment in favor of the regulatory agency.

The judgment asserts that both Kwon and Terraform offered and sold unregistered securities. The claim is focused on LUNA and MIR tokens. 

The SEC argued that Kwon and Terraform “offered and effected transactions in unregistered security-based swaps, and claims that defendants engaged in fraudulent schemes to lead investors astray.”

Read more: Where things stand: The SEC vs Do Kwon and Terraform Labs

Rakoff wrote that he “grants summary judgment for the SEC on Count IV of the Amended Complaint, involving defendants’ unregistered offers and sales of LUNA and MIR in violation of Sections 5(a) and (5c) of the Securities Act.”

“There is no genuine dispute that UST, LUNA, wLUNA, and MIR are securities because they are investment contracts,” Rakoff wrote. He further ruled that Howey’s definition of an investment contract is a “binding statement of the law.”

Rakoff found that UST, wLUNA and the aforementioned LUNA and MIR are investment contracts under the Howey test.

The trial will now focus on the fraud claims that the SEC brought against Terraform and Kwon. The SEC filed its charges in February. 

“Defendants make much of the fact, undisputed by the SEC, that UST on its own was not a security because purchasers understood that its value would remain stable at $1.00 rather than generate a profit,” Rakoff continued.

“But, beginning in March 2021, holders of UST could deposit their tokens in the Anchor Protocol, which defendants’ efforts developed and which Kwon himself publicly announced would generate ‘by far the highest stablecoin yield in the market,’ with a ‘target’ of ‘20% fixed APR.”

Rakoff said that Kwon’s “repeated statements” led investors to believe that they could make a profit due to the efforts of Terraform to develop its blockchain.

The SEC had asked for the judge to grant a judgment on the securities claims to prevent them from being decided by a jury when the case ultimately proceeds to the courtroom. 

“We strongly disagree with the decision and do not believe that the UST stablecoin or the other tokens at issue are securities. Further, the SEC’s fraud claims are not supported by evidence, and we will continue to vigorously defend against those meritless allegations at trial,” a spokesperson for Terraform Labs told Blockworks via email.

The filing confirms that jury selection is set to begin on Jan. 24, with the actual trial beginning Jan. 29.

“Unlike the claims involving offering or selling unregistered securities or security-based swaps, which the Court has resolved as a matter of law, genuine disputes of material fact linger that preclude summary judgment for any party on the fraud claims,” Rakoff wrote.

Additionally, the court denied a motion from the defendants to exclude two SEC experts, and a motion from the SEC to exclude one expert for the defense. 

Judge Rakoff did, however, grant the SEC’s motion to exclude two other defense experts: Raj Unny and Dr. Christine Parlour.

Updated Dec. 29, 2023 at 9:25 am ET: Added comment from Terraform Labs.

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