A U.S. federal court has sided with the Securities and Exchange Commission (SEC) in its case against Terraform Labs and its former CEO, Do Kwon.
District Judge Jed Rakoff ruled that Terraform Labs and its CEO, Do Kwon, distributed two unregistered securities. It is alleged that the company organized the sale of the unregistered LUNA and MIR securities.
According to CoinGape, the SEC sued the defendants, accusing them of creating a fraudulent cryptocurrency scheme that wiped out at least $40 billion in market value in 2022. The court denied both parties' motions for summary judgment on the SEC's fraud claims.
The federal court issued a mixed verdict on the security-based swap claims. Terraform Labs and Do Kwon were found liable for the unregistered offer and sale of these swaps, with the judge focusing on Terraform's Mirror protocol, which allowed users to create "mAssets" that mirror real assets on the blockchain.
Notably, the court did not support the SEC's view that the assets in question were security-based swaps. The SEC alleged that Terraform Labs and Kwon offered and sold unregistered LUNA, UST, and MIR securities. The SEC also argued that by maintaining the Mirror protocol through which "mAssets" could be issued, the defendants offered and traded security-based swaps. The court rejected this argument, however, ruling that the assets did not meet the statutory definition of a security-based swap. The court's ruling acknowledged that they did not meet the statutory definition.
The decision relied heavily on the Howey test for defining securities. The court took into account Kwon's earlier testimony that LUNA investors were actually putting their money into a joint venture with the expectation of profits from Terraform's efforts.
Similarly, the MIR token was evaluated under the same criteria, and the court concluded that it satisfied the Howey test because of the expectation of profits resulting from Terraform's development efforts. The court held that the defendants could not deny that they caused MIR holders to expect profits from a joint venture based on Terraform's efforts to design, maintain, and develop the Mirror protocol.