US District Judge Jed Saul Rakoff ruled that Terraform Labs CEO and founder Do Kwon violated the US securities law by failing to register UST and LUNA as securities. The judge agreed with the Securities and Exchange Commission (SEC) that Terraform Labs offered and sold unregistered securities, which is in violation of Sections 5(a) and 5(c) of the US Securities law. The SEC’s fraud case against Terraform will be tried by a jury next month.
Judge Rakoff’s Ruling
In his ruling, Judge Rakoff stated that securities must be registered with the SEC before they can be sold or offered to sell. He further highlighted that Do Kwon played a significant role in misleading investors by making them believe that Chai was processing and settling transactions on the Terra Blockchain, when it was not. The SEC also accused Kwon and Terraform of engaging in deceptive conduct by secretly making a deal with Jump Trading to restore the $1 peg for UST in exchange for modifying the terms of an agreement for Luna tokens.
“Kwon was the primary architect of the scheme to mislead investors into believing that Chai was processing and settling transactions on the Terra Blockchain, when it was not.” – SEC
Key Developments and Fallout
Terraform Labs faced a $40 billion loss in 2022, which put them in the spotlight of crypto firms facing adversities. Following the collapse of UST and LUNA, the SEC sued Terraform Labs and Do Kwon, alleging that both the Anchor Protocol and the LUNA token are “crypto asset securities,” thereby selling unregistered securities and violating regulations. Do Kwon’s arrest in Montenegro and extradition requests from the US and South Korea added to the ongoing legal battles.
It is important to note that Do Kwon successfully appealed his extradition ruling earlier this month, which introduces another layer of complexity to the case.
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