Terraform Labs faces Judge’s Strong Words In the SEC’s Case Involving Ripple Decision.
The Securities and Exchange Commission’s enforcement action against Terraform Labs and its creator, Do Kwon, was denied dismissal by a federal judge.
Judge Jed Rakoff of the United State District Court for the Southern District of New York rejected Terraform and Kwon’s arguments, saying the civil case could proceed.
Terraform had argued that the recent split decision in the SEC’s case against Ripple Labs rendered the agency’s lawsuit against the stablecoin issuer invalid.
“It may also be mentioned that the Court declines to draw a distinction between these coins based on their manner of sale, such that coins sold directly to institutional investors are considered securities, and those sold through secondary market transactions to retail investors are not. In doing so, the Court rejects the approach recently adopted by another judge of this District in a similar case,” Rakoff stated, noting the Ripple judgment specifically.
Central Questions In The Terraform Case Are Not A Question
Rakoff rejected additional attempts by Terraform and Kwon to have the SEC’s action against them dismissed. Rakoff ruled in the same district court where the Ripple case was tried and partially determined.
The significant questions concept, a legal theory gaining traction in the sector, was also used by Terrform’s attorneys as justification for tossing out the SEC’s claim. The idea states that regulatory bodies cannot act on significant economic or political import matters without congressional approval.
Rakoff also disagreed with such a defense.
“Because the doctrine is reserved for the most extraordinary cases where the agency claims broad regulatory authority and the area to be regulated is one invested with particular economic and political significance, it has been rarely invoked,” Rakoff writes in his Monday ruling on the request to dismiss.
“With this standard in mind, the crypto-currency industry – though certainly important – falls far short of being a ‘portion of the American economy’ bearing ‘vast economic and political significance.'”
Rakoff said that limiting the SEC to solely regulating investment items labeled as securities would be “the exact opposite of what Congress intended” when passing the current securities rules.
In short, there is no indication that Congress intended to limit the SEC’s capacity to decide novel and challenging concerns raised by evolving technology in marketplaces that appear to be securities markets.” Rakoff concluded. Defendants cannot wield a doctrine intended to be applied in exceptional circumstances as a tool to disrupt the routine work that Congress expected the SEC and other administrative agencies to perform.”
Rakoff also stated that the SEC has made compelling claims that Terraform’s digital assets and sales are securities offerings and that the SEC has jurisdiction to prosecute the lawsuit.
Nonetheless, Terraform’s lawyers gained a modest success in a second court on Monday. A federal bankruptcy judge granted a demand for wallets and account information from FTX linked to potential Terra/Luna short sellers.
Terraform claims that the material, which FTX’s lawyers have agreed to disclose, would help them defend against an SEC allegation that Terraform conspired with Jump Trading to jack up the price of UST in 2021, a year before its collapse.
UPDATED with details from the judge’s denial of Terraform’s move to dismiss and context from the FTX bankruptcy.
