Terraform Labs won a partial victory on December 28 in a case brought by the US Securities and Exchange Commission (SEC).
Judge Jed Rakoff issued one summary judgment in favor of Terraform Labs, stating that the company did not offer and execute transactions in security-based swaps.
The judge said mAssets offered on the Terra-based Mirror Protocol met most, but not all, of the requirements of security-based swaps. Specifically, he said these do not involve a transfer of financial risk because of mAsset’s collateral model: because users must add new collateral as prices rise, they bear the risk themselves and not of future changes, which debunks the SEC’s complaint.
Judge Rakoff nonetheless issued another summary judgment ruling that largely upheld the SEC’s broader allegations surrounding securities. He ruled that there is “no genuine dispute” that several 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 violated the Securities Act.
The judge noted that the SEC’s summary judgment motion did not mention any possible financial resolution. He said this will be determined after liability has been established through another summary proceeding.
Fraud claims will be settled at trial
Regardless of the above rulings, the judge said that fraud claims should be resolved at trial as these issues involve “genuine disputes over material facts.”
The SEC’s fraud claims involve two issues. The first concerns an earlier depeg of Terra’s UST stablecoin. The SEC alleges that Terraform Labs co-founder Do Kwon made a deal with Jump Crypto to help UST restore its price peg, while Kwon publicly claimed that Terra’s algorithm solely caused the recovery.
The second issue concerns whether Chai Corp., a South Korean payments company founded by Daniel Shin, co-founder of Terraform Labs, actually used the Terra blockchain as advertised. The SEC alleges that Do Kwon falsely represented Chai as processing and settling transactions on the blockchain.
According to the latest filing, the fraud trial will take place on January 29, 2024.