Terraform Labs Gains Mixed Outcomes in SEC Legal Tussle

Judge's Rulings Offer Mixed Bag

In a noteworthy legal encounter, Terraform Labs has recently experienced a mixed bag of outcomes. The case, presided over by Judge Jed Rakoff, revolved around allegations by the U.S. Securities and Exchange Commission (SEC). The judge delivered a nuanced verdict on December 28th.

A Partial Victory for Terraform Labs

Judge Rakoff rendered a summary judgment partially favoring Terraform Labs. He declared the firm not guilty of offering and executing transactions in security-based swaps. This ruling pivots on the nature of mAssets provided on the Terra-based Mirror Protocol. The judge elaborated that these mAssets, while meeting several criteria for security-based swaps, fall short in one crucial aspect. They do not entail the transfer of financial risk owing to their unique collateralization model. This model necessitates users to bolster collateral in response to price surges, thus bearing the risk independently. This finding undermines the SEC's argument.

SEC's Broader Allegations Largely Upheld

Conversely, Judge Rakoff upheld the SEC's broader allegations concerning securities. He decisively ruled that various assets, including Terraform's UST, LUNA, wLUNA, and MIR tokens, constitute investment contracts and thus qualify as securities. The judge underscored the unregistered nature of these sales, deeming them violative of the Securities Act.

Pending Financial Remedies and Liability Determination

The judgment also highlighted the absence of any proposed financial remedies in the SEC's request for summary judgment. The judge mentioned that such remedies would be contemplated post the establishment of liability in another summary judgment.

Fraud Claims Await Trial Verdict

In a separate dimension of the case, Judge Rakoff indicated that fraud claims necessitate trial resolution. These claims involve significant factual disputes. Among them is the SEC's allegation that Terraform Labs co-founder Do Kwon covertly collaborated with Jump Crypto to restore UST's price peg, contradicting his public claims of an algorithm-driven recovery. Another contentious point is the alleged misrepresentation by Do Kwon regarding Chai Corp.'s use of the Terra blockchain for transaction processing.

While Terraform Labs enjoys partial legal triumph, the persistence of serious fraud allegations and unresolved securities disputes casts a shadow over the firm's regulatory compliance.