SEC Moves to Summary Judgement in Lawsuit against Terraform and Do Kwon

2023-11-15, 05:03

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## TL; DR

The SEC has filed a motion for a summary judgement against Terraform and Kwon.

Terraform Labs disagrees that its crypto assets like UST and LUNA are securities.

Judge Jed Rakoff believes that the Howey Test does not categorize investment assets as securities based on where they are sold and who purchases them.

## Introduction

Digital assets like cryptocurrencies and non-fungible tokens can succeed or fail. For instance, there are many non-fungible tokens that have values of zeros. On the other hand, there are cryptocurrencies that have imploded resulting in loss of investor funds.

Terraform Labs is an example of a crypto project that developed cryptocurrencies that collapsed. Since their implosion resulted in loss of investor funds it faced lawsuits in the United States.

In this article, we focus on the SEC's lawsuit against Terraform Labs and Do Kwon. We will also discuss the SEC’s and Terraform’s calls for summary judgement. It is interesting to find out who stands a better chance of winning the case.

## SEC’s Lawsuit against Terraform and Do Kwon

On 2 November 2023 the Securities and Exchange Commission (SEC) filed a motion for a summary judgement of its lawsuit against Terraform Labs [and Do Kwon](https://www.gate.io/blog_detail/2238/do-kwon-reaches-5-star-wanted-level-as-sec-brings-more-fraud-charges "and Do Kwon"). The basis for [SEC’s current position](https://storage.courtlistener.com/recap/gov.uscourts.nysd.594150/gov.uscourts.nysd.594150.105.0.pdf "SEC’s current position") is that there is “no genuine dispute as to any material fact." The SEC maintains that it is clear that the investors purchased the tokens using fiat currency or crypto assets.

The SEC’s argument is that the investors put their funds in the listed crypto assets with the hope of getting profit from that. In that regard, the cryptocurrencies meet the Howey Test criteria. The United States uses the Howey Test to determine whether or not an investment asset is a security under the federal law.

In its filing, the SEC explained the different pieces of evidence it has against Terraform Labs and Kwon. Basically, the details in the document is a summary of its allegations against Terraform Labs which include marketing its tokens as securities, targeting United States citizens, positioning LUNA as an investment asset, violation of US antifraud provisions and its promise to undertake efforts to generate profit.

[And it concluded by saying](https://storage.courtlistener.com/recap/gov.uscourts.nysd.594150/gov.uscourts.nysd.594150.105.0.pdf "And it concluded by saying"), “For the foregoing reasons, summary judgment is warranted against Defendants Terraform and Kwon on all of the SEC’s claims.”

## SEC’s Key Allegations

The SEC’s focal allegation against Terraform is that Kwon and the company orchestrated a financial scheme to defraud investors of their funds. As a result, Terraform defrauded investors of more than $45 billion they invested in different crypto assets that include mirrored assets (mAssets) <a href="/price/terra-luna" target="_blank" class="blog_inner_link">Terra</a> Classic (LUNC), Mirror Protocol (MIR) and <a href="/price/terraclassicusd-ustc" target="_blank" class="blog_inner_link">TerraClassicUSD</a> (USTC).

Also, the SEC believes that Terraform developed the Terra blockchain to create an impression that there were real transactions which may generate profit for the investors. As such, from time to time, they lied to the investors that their so-called stablecoin, UST, was stable.

When the coin collapsed the investors lost both their invested funds and the intended profit. The SEC also claims that the defendants cashed out much fiat currency. Notably, the Terra USD (UST) which was pegged against the United States dollar was algorithmically tied to its other cryptocurrency called LUNA.

Regarding this, [the SEC said](https://storage.courtlistener.com/recap/gov.uscourts.nysd.594150/gov.uscourts.nysd.594150.105.0.pdf "the SEC said"), “Defendants also represented to the public that each UST token was safely and automatically pegged to the U.S. Dollar via a blockchain algorithm linking it with LUNA.”

According to the SEC, Terraform used an aggressive marketing strategy to lure individuals and institutions to invest in their tokens. It stated, “Defendants promised investors that LUNA’s value would appreciate the more the Terra blockchain was used, and repeatedly touted the managerial and entrepreneurial efforts they would and did undertake to accomplish that goal.”

[In its filing document](https://storage.courtlistener.com/recap/gov.uscourts.nysd.594150/gov.uscourts.nysd.594150.105.0.pdf "In its filing document") the SEC emphasized that Kwon and Terraform used deception in convincing the investors that UST and LUNA were worth investment assets.

As an example, the SEC cited Terraform’s allusion that Chai, a popular Korean online payment platform, was using its blockchain to facilitate merchant payments. To convince the users that Terra blockchain was working with Chai the team added fake transactions on its blockchain.

The ultimate goal of the SEC lawsuits against Terraform and Kwon was to get permanent injunction, prejudgment interest, disgorgement and civil penalties. Incidentally, the SEC filing for a summary judgement comes after a Federal Court jury of 12 found Sam Bankman-Fried, the former CEO and founder of FTX crypto exchange guilty of several charges. This also followed Terraform and Kwon’s submission of their own motion for summary judgement.

## Terraform and Kwon Filed for Summary Judgement

The basis of Terraform and Kwon’s call for summary judgement is that the SEC has failed to prove beyond doubt that Terraform and Kwon committed the said crimes. As a fact, the SEC has been carrying out extensive investigations against the defendants for the past two years to come up with concrete evidence against them.

The defendants have denied the SEC’s charge that they sold unregistered securities, claiming that their crypto assets do not meet all the criteria of the Howey Test. On the other hand, the SEC maintains its position that stablecoins are crypto securities. The legal team for Terraform and Kwon also accuses the SEC of falsely claiming that the blockchain firm moved funds to its Swiss accounts.

The legal counsel for Terraform and Kwon, therefore, is requesting the Federal court to [dismiss the SEC against Terraform case](https://www.gate.io/zh-tw/blog_detail/3319/sec-vs-ripple-case-extended-to-end-2024 "dismiss the SEC against Terraform case"). In the meantime, the former Terraform CEO, Kwon, who is in detention in Montenegro, is seeking to counter the SEC’s efforts to have him extradited to the United States.

## SEC against Terraform and Kwon Case Chronology

The SEC filed its lawsuit against Terraform Labs, a Singapore based firm and Kwon, its founder and CEO, for orchestrating a multi-billion dollar crypto investment scheme. Since that time [the SEC against Terraform case](https://www.gate.io/blog_detail/2238/do-kwon-reaches-5-star-wanted-level-as-sec-brings-more-fraud-charges "the SEC against Terraform case") was before the United States Federal court.

On 31 July Judge Jed Rakoff of the United States District Court for the Southern District of New York (SDNY) rejected the defendants’ motion to dismiss charges in SEC v. Terraform Labs case.

Judge Rakoff also declined to follow the ruling by SDNY Judge Analisa Torres in the [SEC v. Ripple Labs case](https://www.gate.io/blog_detail/3379/xrp-soars-sec-drops-charges-ripples-leaders "SEC v. Ripple Labs case") pertaining to crypto securities. He has also not bought into the argument that [all stablecoins are securities](https://www.gate.io/uk/blog_detail/2708/sec-labels-37-cryptocurrencies-as-securities-implications-for-trading "all stablecoins are securities"). Noteworthy, he has asserted that the Howey Test does not categorize investment assets as securities based on where they are sold and who purchases them.

The recent developments, as we noted earlier, involve both the SEC and the Terraform Legal team’s submissions of motions for summary dismissal of the SEC [vs. Do Kwon case](https://www.gate.io/es/blog_detail/2430/terra-luna-tokens-fall-steeply-on-do-kwon-s-arrest "vs. Do Kwon case").

## Conclusion

Both the SEC and the legal team for Terraform Labs have filed motions for a summary judgement. Currently, the Federal court has not made a decision on whether or not to pass the requested summary judgement. The Terraform team has argued that the SEC has failed to provide a proof of securities offer. On the other hand, the SEC maintains that there is ample evidence to prove Terraform and Kwon’s misconduct.

## FAQS about Terraform Labs

### What is SEC’s complaint against Terraform?

The SEC’s main allegation against Terraform is that the company orchestrated a financial scheme to defraud investors of their funds. It claimed that Terraform defrauded investors of more than $45 billion they invested in different crypto assets that include mirrored assets (mAssets) Terra Classic (LUNC), Mirror Protocol (MIR) and Terra Classic USD (USTC).

### What did the SEC charge Terraform with?

The SEC accused Terraform of operating a fraudulent financial investment program that involved cryptocurrencies. It alleges that Terraform and Kwon defrauded its customers of more than $45 billion.

### What is the Terraform controversy?

Terraform accused Citadel Securities of contributing to the TerraUSD’s (UST) [depegging event](https://www.gate.io/blog_detail/1302/the-impact-of-usdt-depegging-on-the-crypto-market "depegging event"). Terraform claims that Citadel Securities destabilized UST through shorting which led to its collapse.

### Who owns Terraform?

Do Kwon and Daniel Shin established and developed Terraform to become one of the leading blockchains by 2022. It is well-known for its stablecoin, TerraUSD, and [LUNA token](https://www.gate.io/learn/articles/what-is-luna/114 "LUNA token") which imploded last year.

<div class="blog-details-info">
<div>Author:** Mashell C.**, Gate.io Researcher
<div class="info-tips">\*This article represents only the views of the researcher and does not constitute any investment suggestions.
<div>\*Gate.io reserves all rights to this article. Reposting of the article will be permitted provided Gate.io is referenced. In all cases, legal action will be taken due to copyright infringement.
</div>