US judge sides with SEC, after ruling Do Kwon and Terraform Labs violated US law by failing to register two digital currencies
This week there has been another legal setback for Kwon Do-hyeong (also known as Do Kwon), the disgraced founder of collapsed crypto company Terraform Labs.
Reuters reported that a federal judge ruled on Thursday that Do Kwon and Terraform Labs had violated US law by failing to register two digital currencies that collapsed in 2022.
US District Judge Jed Rakoff in Manhattan sided with the Securities and Exchange Commission (SEC) in its case stemming from the failure of the TerraUSD and Luna currencies.
Judge Rakoff also denied summary judgement to both sides on the SEC’s fraud claims, which will proceed toward a scheduled 29 January 2024 trial, Reuters reported.
The judge did however dismiss SEC claims that the defendants illegally offered security-based swaps.
A Terraform spokesman reportedly said the company strongly disagreed with the decision, did not believe its tokens were securities, and would continue defending against the SEC’s “meritless” fraud claims at trial.
In a 71-page decision, Judge Rakoff reportedly said there was “no genuine dispute” that the four crypto assets were securities under a 1946 US Supreme Court decision defining investment contracts.
The Court had ruled in that case, SEC v WJ Howey Co, that an investment of money in a common enterprise, with profits to come solely from others’ efforts, was an investment contract.
But the judge also said reasonable jurors could disagree over whether the defendants intended to defraud investors in multiple statements about Terraform’s business.
Judge Rakoff said the SEC’s remedies for the sale of unregistered securities would be decided once the defendants’ liability on the fraud claims has been resolved.
The cryptocurrency industry has fiercely denied that its tokens qualify as securities.
Reuters reported that it won a victory in July when another judge on the Manhattan federal court said some tokens sold by Ripple Labs did not qualify as securities, because purchasers did not know if their money went to Ripple or third parties.
The case against Do Kwon and Terralabs has been ongoing for a while now, after Do Kwon had moved from South Korea to Singapore with his family following the collapse of his $40 billion digital asset project – which included the stablecoin Terra and its sister token Luna.
Terraform had issued the TerraUSD “stablecoin”, intended to maintain a 1:1 peg with the US dollar.
It is thought that nearly 250,000 people had invested in Terraform Labs’ coins, and blockchain analytics firm Elliptic estimated that investors in TerraUSD and Luna lost an estimated $42 billion.
Do Kwon had denied that he was on the run, but he did not reveal his whereabouts after police in Singapore could not locate him.
Then in February 2023 the US Securities and Exchange Commission (SEC) “charged Singapore-based Terraform Labs PTE Ltd and Do Hyeong Kwon with orchestrating a multi-billion dollar crypto asset securities fraud.
Shortly after that in March 2023 Do Kwon was arrested in Podgorica, the capital city of the Balkan country of Montenegro. Both South Korea and the US sought his extradition to their respective jurisdictions.
Kwon and a second person identified as Han Chang-joon, Terraform Labs’ former finance officer, had been arrested when they tried to board a flight to Dubai.
Do Kwon had been sentenced to four months in prison in Montenegro for using fake travel documents, and after that sentence was served, he was extradited to the United States, despite the protests of Do Kwon.