Judge Turns Down Terraform Labs’ Request To Dismiss SEC Lawsuit

Judge Turns Down Terraform Labs’ Request To Dismiss SEC Lawsuit

On Monday, the crypto industry saw another high-stakes ruling delivered by US District Judge Jed Rakoff, as he denied the motion submitted by Terraform Labs.

The motion in question had been filed for the dismissal of the lawsuit filed by the US Securities and Exchange Commission (SEC) against Terraform Labs for securities fraud.

The decision

This means that the lawsuit filed by the SEC against Terraform Labs, along with Do Kwon, its co-founder will proceed.

The judge turned down arguments from the defense that the SEC does not have jurisdiction and that the TerraUSD stablecoin of the company is not an unregistered security.

The most important thing to note was that the judge refused to extend reasoning from a recent decision of the court in favor of Ripple Labs to the case against Terraform Labs.

In the Ripple case, another judge had found that the securities laws were not violated by the sale of the XRP token to retail investors as they had made the purchases on secondary markets.

However, according to Rakoff, this particular difference between purchasers is not applicable in the case of the Howey test, which is used for determining whether a token is a security or not.

The judge

According to the judge, the Howey test does not differentiate between purchases, which makes sense. Therefore, he added that the court would not make a distinction between the coins as per their method of sale.

The judge went on to say that Terraform Labs had opted to make a broad and bold pitch. He asserted that a public campaign had been launched by the defendants targeting both institutional and retail investors.

In this campaign, they encouraged the investors to purchase their crypto assets due to their profitability.

They also touted maximum returns on the crypto assets thanks to their technical and managerial skills.

Therefore, Rakoff said that those purchasing the tokens from secondary markets also had good reason to believe that their capital would be used by the defendants to generate profits for them.

SEC victory

The 50-page opinion from Judge Rakoff is undoubtedly a big victory for the SEC, as the agency continues to take enforcement action in the crypto industry over illegal token sales.

The judge stated that the TerraUSD stablecoin may have been security, which means it should have been registered.

The stablecoin collapsed last year after it lost its dollar peg, which saw it wipe out about $40 billion from the market.

Terraform Labs had also argued that the SEC did not have the authority for regulating stablecoins, as there had been no such approval from Congress.

It stated that the Major Questions Doctrine applies here because crypto is a significant issue. According to the judge, the agency overreach is limited by the doctrine where political issues are concerned.

However, he ruled that this is not applicable to crypto markets. As per the judge, the industry does not have huge economic or political significance on the American economy.