U.S Court Declares LUNA and UST Securities in SEC v Terraform, Do Kwon Case

Terra ecosystem tokens, formerly named LUNA and TerraUSD (UST), have been deemed securities in the longstanding SEC lawsuit against Terraform Labs (TFL) and its founder, Do Kwon. 

In a statement released on Thursday, U.S. District Judge Jed Rakoff handed a big win to the United States Securities and Exchange Commission (SEC), which could bolster the agency’s crypto regulation by enforcement approach.

Recall that the SEC sued TFL and Do Kwon in February 2023 and amended the complaint in April 2023 following the historic collapse of UST and LUNA in May 2021. The Securities Commission claimed the defendants’ orchestrated a multi-billion-dollar fraud involving the development, marketing, and sale of various cryptocurrencies. 

Particularly, the SEC alleged that the defendants offered and sold unregistered securities, offered and effected transactions in unregistered security-based swaps, and engaged in fraudulent schemes to mislead investors. To support its fraud claims, the SEC offered two expert witnesses: Dr. Bruce Mizrach and Dr. Matthew Edman. Ten months into the ongoing lawsuit, the presiding judge submitted his judgments. 

Court’s stance on LUNA and UST

Judge Rakoff ruled on LUNA, UST, wLUNA and MIR as securities, noting there is no genuine dispute they are securities because they are investment contracts. The court also said there is no profound argument Terraform Labs and CEO Kwon violated federal laws by offering and selling these unregistered securities. 

Among other bases for concluding these Terra-related tokens passed the Howey test with flying colours, the court cited previous comments from Kwon. In one public tweet, Kwon told LUNA holders to “[s]it back and watch [him] kick a*s.” In another referenced tweet, the Terra founder said: “LUNA value is actionable –- it grows as the [Terraform] ecosystem grows.”

According to the court, these statements implied a person could invest in LUNA, UST and MIR (common enterprises) and expect profits solely from the efforts of the TFL and Kwon. Thus, the Court granted summary judgment for the SEC regarding the defendants’ unregistered offers and sales of LUNA and MIR in violation of the Securities Act. 

Noting that the defendants did not offer or effect transactions in security-based swaps as claimed by the SEC, Judge Rakoff also granted summary judgment for Terraform Labs and Do Kwon in this regard. 

Moreover, the Court denied TFL’s motions to exclude the testimony of the SEC’s experts, Dr. Bruce Mizrach and Dr. Matthew Edman. Likewise, the SEC’s motion to exclude the testimony of defense expert Dr. Terrence Hendershott was not granted. However, Judge Rakoff granted the SEC’s motion to exclude the testimony of defense experts Mr. Raj Unny and Dr. Christine Parlour. 

While the Court denied both parties’ cross-motions for summary judgment on the remaining claims of fraud, the jury trial for the remaining claims in the SEC v Terraform Labs and Do Kwon lawsuit is scheduled for January 29, 2024. 

SEC enforcement agenda regains momentum

In July 2023, the SEC suffered defeat at the hands of Ripple after Judge Analisa Torres declared XRP a non-security. This led to XRP securing regulatory clarity in several regions including the United States and Dubai.

Therefore, the latest developments in the Terra case mark a major victory for the SEC. In other words, it could serve as a huge bolster for the Securities Commission in its crypto regulation by enforcement agenda. This suggests the SEC could label more cryptoassets securities in the future, citing LUNA and UST. 

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