Judge Rules TerraUSD and Luna Are Unregistered Securities
On Thursday, December 28, 2023, U.S. District Judge for the Southern District of New York Jed S. Rakoff ruled that cryptocurrency entrepreneur Do Kwon and his company Terraform Labs violated federal securities laws by failing to register two digital tokens, TerraUSD and Luna, that collapsed in value earlier this year.
Judge Rakoff sided with the U.S. Securities and Exchange Commission (SEC) in its case alleging that Terraform Labs sold unregistered securities. However, Judge Rakoff denied summary judgment for both sides on the SEC’s fraud claims, determining those claims would need to proceed to the scheduled jury trial starting on January 29, 2024.
In his 71-page decision, Rakoff found that under the 1946 Supreme Court case SEC v. W.J. Howey Co., TerraUSD, Luna, and two other crypto assets promoted by Terraform Labs met the definition of an “investment contract”, and were, therefore, securities that should have been registered with the SEC.
Representing Terraform Labs, a spokesperson disagreed with the ruling and said the company does not believe the tokens were securities. They intend to continue defending against the SEC’s fraud allegations in court.
Do Kwon, a South Korean founder of Terraform Labs, is also facing criminal fraud charges from Manhattan federal prosecutors related to the collapse of TerraUSD and Luna in May 2022, which at the time wiped out an estimated $40 billion in market value and further roiled cryptocurrency prices. Kwon has been fighting extradition efforts after being arrested in Montenegro in March.
The case is being closely watched in the cryptocurrency industry as a test of whether tokens promoted and sold for investment purposes will be considered securities under US law. It remains to be seen if the jury will ultimately find Terraform Labs or Do Kwon liable for the fraud accusations at the upcoming trial in January.
Source: Reuters
