Terra wins one summary judgment in SEC case, but sold unregistered securities

Terraform Labs obtained a partial victory on Dec. 28 within a case initiated by the U.S. Securities and Exchange Commission (SEC).

Judge Jed Rakoff issued one summary judgment in Terraform Labs’ favor and declared that the firm did not offer and effect transactions in security-based swaps.

The judge said that mAssets offered on the Terra-based Mirror Protocol satisfied most but not all of the requirements of security-based swaps. Specifically, he said that these involve no transfer of financial risk due to mAsset’s collateralization model: because users must add new collateral as prices increase, they bear risk themselves and not from future changes, invalidating the SEC’s complaint.

Judge Rakoff nevertheless issued another summary judgment that largely validated the SEC’s broader allegations around securities. He ruled that there is “no genuine dispute” that various assets including Terraform’s UST, LUNA, wLUNA, and MIR tokens are investment contracts and therefore securities. Furthermore, he ruled that these sales were unregistered and in violation of the Securities Act.

The judge noted that the SEC’s request for summary judgment did not mention any possible financial remedies. He said that this will be determined after liability is established through another summary judgment.

Fraud claims will be settled in trial

Separate from the above rulings, the judge said that fraud claims must be resolved at trial as these issues concern “genuine disputes of material fact.”

The SEC’s frauds claims concern two matters. The first concerns a past depeg of Terra’s UST stablecoin. The SEC alleges that Terraform Labs co-founder Do Kwon reached a deal with Jump Crypto to help UST recover its price peg, even as Kwon publicly claimed that Terra’s algorithm had solely caused the recovery.

The second matter concerns whether Chai Corp., a South Korean payments company founded by Terraform Labs co-founder Daniel Shin, actually used the Terra blockchain as advertised. The SEC alleges that Do Kwon falsely represented Chai as processing and settling transactions on the blockchain.

The fraud trial will take place on Jan 29, 2024, according to the latest filing.