Texas Judge Dismisses Consensys Lawsuit Against SEC

Consensys is very disappointed in the ruling, but plans to continue fighting the SEC’s allegations. Meanwhile, the SEC is requesting more time for document production in its lawsuit against Coinbase, and a US bankruptcy judge approved Terraform Labs’ bankruptcy plan. Prosecutors are also defending the conviction of Mango Markets exploiter Avraham Eisenberg, who is facing serious prison time for fraud and market manipulation.

Consensys Lawsuit Against SEC Dropped

A Texas federal judge decided to dismiss the lawsuit that was filed by blockchain development firm Consensys against the US Securities and Exchange Commission (SEC) and its five Commissioners, including Chair Gary Gensler. The lawsuit started in April, and sought a court declaration that Ethereum (ETH) is not a security and that Consensys’ sales of ETH do not involve securities. It also wanted to prevent the SEC from taking enforcement action regarding aspects of its MetaMask wallet software, which the regulator ended up doing in June.

Consensys argued that the SEC opened an investigation into Ethereum to regulate it as a security, and issued the company a Wells notice concerning MetaMask’s swap and staking services. However, in a decision on Sept. 19, Judge Reed O’Connor dismissed Consensys’ claims related to MetaMask, and stated that enforcement actions do not qualify as final agency actions. He also pointed out that the Wells notice was not the end of the SEC’s decision-making process and did not actually establish any legal obligations or consequences for Consensys.

The judge also dismissed claims regarding the SEC’s investigation into Ethereum after the regulator’s approval of ETH exchange-traded funds (ETFs) in May. Consensys acknowledged in July that the SEC dropped its investigation into Ethereum, after which the court recognized that Consensys already got the relief it asked for on that matter.

In response, Consensys shared its disappointment about the court’s procedural dismissal of the lawsuit, and stated that the merits of its claims were not addressed at all. The company pointed out that the SEC dropped its Ethereum 2.0 investigation only after the litigation began. 

Consensys also confirmed its intention to continue challenging the SEC’s lawsuit about its MetaMask software, where the agency alleges it acted as an unregistered broker and offered unregistered securities through MetaMask Swaps. The company is now expected to file a motion to dismiss the case.

SEC Asks Court for More Time in Coinbase Lawsuit

Despite the Consensys lawsuit dismissal, the SEC still has its hands very full fighting other legal battles. Lawyers for the SEC have requested a court extension until February of 2025 to produce “hundreds of thousands of documents” in discovery proceedings with crypto exchange Coinbase. 

In a filing on Sept. 18 in the US District Court for the Southern District of New York, the SEC asked for a four-month extension to complete its document production. The original date was set for Oct.18. This request was made after Coinbase’s partial victory in a motion to compel discovery that requires the SEC to provide information about its application of securities laws to tokens.

The SEC’s filing indicated that it was reviewing at least 133,582 unique documents and needed the extension to fully comply with the court’s order. If Judge Katherine Failla grants the request, the SEC will have until Feb. 18 to complete fact discovery. Expert discovery and depositions will then potentially extend until Apr. 22. A jury trial in the case will likely not take place until 2025.

Not only does the regulator have its hands full legally, but US lawmakers are also debating the role the commission should have in regulating digital assets. The House Subcommittee on Digital Assets, Financial Technology, and Inclusion met on Sept. 18 to examine whether the SEC, under Chair Gary Gensler, has taken a more “politicized approach” to crypto regulation.

Despite having so much on its plate, the SEC’s lawsuit against Coinbase is part of a much larger plan to regulate the crypto industry. The commission’s main allegation is that exchanges offered and sold tokens as unregistered securities. In 2024, a judge ordered Ripple Labs to pay the SEC $125 million after a lengthy legal battle, and Terraform Labs settled with the regulator for over $4 billion. Some of the still ongoing enforcement cases involve major firms like Binance and Kraken.

Judge Approves Terraform Labs Bankruptcy Plan

In other legal news, a US bankruptcy judge approved the winding down of Terraform Labs as part of the company’s bankruptcy plan. According to a Reuters report on Sept. 19, Judge Brendan Shannon of the US Bankruptcy Court for the District of Delaware signed off on the plan, which Terraform filed for Chapter 11 protection in January. Liabilities and assets were estimated between $100 million and $500 million. Judge Shannon described the plan as a very “welcome alternative” to prolonged litigation over investor losses.

Terraform’s bankruptcy happened after a lawsuit was filed by the SEC against the platform and its founder, Do Kwon, in February of 2023. The collapse of Terraform in 2022 was linked to the instability of its algorithmic stablecoin, UST, and questionable claims made by its founders about the blockchain’s use cases. This failure set off a chain reaction in the crypto industry, which caused companies like BlockFi, FTX, and Celsius to also file for bankruptcy in the same year.

In April of 2024, a judge ruled that Terraform and Kwon defrauded investors, and ordered them to pay around $4.5 billion in fines and civil penalties to the SEC. During the Sept. 19 hearing, Terraform proposed that it could pay between $185 million and $442 million as part of its wind-down plan, though its total losses are still difficult to quantify. The reality is that many investors may not be fully compensated.

Both the SEC and bankruptcy proceedings have progressed without Kwon, who was arrested in Montenegro in 2023 for using falsified travel documents. After serving four months in prison, Kwon now awaits extradition to either the US or South Korea, where he faces multiple criminal charges. 

Prosecutors Defend Conviction of Mango Markets Exploiter

Meanwhile, prosecutors from the United States Southern District of New York (SDNY) filed a motion opposing Mango Markets exploiter Avraham Eisenberg’s request for an acquittal or a new trial. According to court documents that were filed on Sept. 18, the prosecution argued that the jury properly convicted Eisenberg based on the large amount of evidence against him, including the fact that Mango perpetual swaps fall under the Commodities Exchange Act.

The federal prosecutors rejected Eisenberg’s defense, which claimed that the fraud charges were inapplicable because he did not manipulate the underlying asset’s market price. They pointed out that the jury had clear instructions on price manipulation and argued that fraud was central to Eisenberg’s scheme. 

Prosecutors also dismissed a jurisdictional challenge from Eisenberg’s legal team, and clarified that the Southern District of New York had authority to try the case as many Mango Markets employees were based in Manhattan.

The Mango Markets exploit happened on Oct. 11 of 2022, when $100 million was drained from the platform. This caused the Mango token (MNGO) to lose 52% of its value in just 24 hours. 

Eisenberg later admitted to being behind the exploit, but claimed it was a “legal open market action.” However, in December of 2022, he was arrested in Puerto Rico and charged with fraud and market manipulation. A jury found Eisenberg guilty in April 2024, and he now faces up to 20 years in prison if sentenced to the maximum penalty.