Terraform Labs Ordered to Comply With SEC Probe, After Losing Appeal
Terraform Labs has lost its appeal against the Securities and Exchange Commission, meaning the firm is obligated to respond to the SEC’s investigation into the Mirror Protocol on federal securities laws infringement allegations.
Terraform Labs’ court loss over Mirror Protocol opens the doors for greater action on the collapse of stablecoin TerraUSD.
Court documents revealed Wednesday that the United States Court of Appeals for the Second Circuit had ordered Terraform Labs and its CEO Do Kwon to comply with the U.S. Securities and Exchange Commission’s investigative subpoenas.
The SEC is investigating whether Terraform Labs and Kwon broke the law by selling unregistered securities in the U.S. through Mirror Protocol, a DeFi platform for synthetic assets on the now defunct Terra Classic blockchain. After allegedly failing to obtain voluntary cooperation, the SEC prepared two investigative subpoenas—one for Kwon, one for Terraform Labs—and served Kwon in person at the Messari Mainnet conference in New York on September 20, 2021.
In the attempted appeal, Kwon’s lawyers argued that the SEC does not have jurisdiction over Kwon and Terraform Labs, both based in South Korea (though Terraform is registered in Singapore). Kwon had promulgated the claim that the SEC had no jurisdiction back in December. His attorneys also objected to the procedure of serving Kwon directly rather than his lawyers.
The appellate court dismissed both arguments, concluding that “the district court properly granted the SEC’s application,” and “properly concluded that it had personal jurisdiction over Terraform and Kwon.” In explaining its ruling, the court wrote that “the SEC followed the rules,” and correctly served the investigative subpoenas to both Terraform and Kwon.
The ruling means that Terraform Labs and Kwon are now compelled to provide the SEC with all requested documents and testimony needed in its investigation into Mirror Protocol. Built by Terraform Labs, the protocol allowed users to create and trade synthetic assets tracking the price of real-world securities, including stocks of corporations like Apple and Tesla, listed on the New York Stock Exchange. The SEC likely deems these assets securities and consequently their promotion and sale to U.S. customers as unlawful.
In its response to the decision, the SEC noted that the court had found Terraform’s “‘purposeful and extensive U.S. contacts’ such as promoting to US investors, employing US-based personnel, and contracting with US-based entities” as the basis for the determination that a base in South Korea does not insulate the firm from US accountability.
“I find that there is specific personal jurisdiction with respect to both Kwon and Terraform Labs because they purposefully availed themselves of the privilege of doing business in the United States,” wrote the judge in the initial district court decision. “There are employees in the United States, including the general counsel, which I think is telling.”
In the event of a broader legal case, Terraform Labs or any related entity would also likely end up facing the threat of jurisdictional discovery, a process that would put to the public record information potentially establishing links between companies. Findings can then end up streamlining civil cases, including potential class actions, that would similarly have been on the hunt to establish jurisdiction.
