SEC court win over Terraform and Do Kwon opens door for UST investigation

Terraform Labs’ court loss over Mirror Protocol opens the doors for greater action on the collapse of stablecoin TerraUSD. 

Yesterday, the Second Circuit Court rejected Terraform Labs’ appeal against the Securities and Exchange Commission, upholding an earlier decision from the Southern District of New York. The SEC served founder Do Kwon with a subpoena as he prepared to go onstage to speak at Messari’s MainNet event in Manhattan back in November. 

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.

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.”

The case has major ramifications, both for Mirror Protocol, which allowed users to trade tokens whose prices mirrored US stocks, and for the broader network of connected projects. Most prominently that includes TerraUSD (UST), whose dramatic crash early in May wiped out over $40 billion in value and has shaken the whole crypto ecosystem.

In the lead-up to the final decision, David Shargel, a partner at law firm Bracewell, told The Block: “Whatever the Second Circuit decides will either encourage a class-action lawsuit in the United States or really throw some water on plaintiffs’ lawyers even thinking about it.”  

Consequently, the Second Circuit’s establishment of jurisdiction over Terraform in the case of Mirror has ramifications both for further legal action from US authorities, and potential class actions from private citizens.

“As the Second Circuit made clear, courts will find jurisdiction, including over foreign persons and issuers, where the US capital markets are accessed, tokens are promoted to US investors, and promoters facilitate secondary trading in the US,” Attorney Philip Moustakis, who left the SEC to join Seward & Kissel’s blockchain and cryptocurrency practice, told The Block in an email.

On June 9, South Korean news outlet JBTC reported that the SEC was investigating some of UST’s lead designers, as well as suspected money laundering by Do Kwon. Citing an unnamed source, Bloomberg’s Matt Robinson also wrote that the SEC had begun a probe into the UST crash. 

“I don’t see how the SEC or CFTC could not investigate the ashes of UST and Luna as well as other stablecoins and their issuers,” wrote Moustakis. “In fact, I would expect some coordination between the two agencies in this regard.”

There are legal complications to pursuing distinct business entities. The emergence of the Luna Foundation Guard, or LFG, in January, shortly after Terraform began its suit against the SEC, complicated matters. LFG is a non-profit registered in Singapore.

Singapore hosts a fairly opaque system of corporate registration and court record access. But given all the public scrutiny, it is certainly possible to establish a meaningful relationship between Terraform Labs and LFG. “They may be separate entities but they’re companies that are potentially run by the same people and using the same sort of infrastructure,” said Shargel.  

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. 

The SEC had not responded to a request for comment as of publication time. The agency generally does not comment on investigations. 

© 2022 The Block Crypto, Inc. All Rights Reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.

Source: https://www.theblockcrypto.com/post/151226/sec-court-win-over-terraform-and-do-kwon-opens-door-for-ust-investigation-class-actions?utm_source=rss&utm_medium=rss