- Terraform Labs, the SEC, and Jump Trading face a jury trial next month after a judge ruled in favor of the SEC’s fraud case against Terraform
- The ruling acknowledges Terraform’s liability for selling unregistered securities but dismisses allegations of unregistered security-based swaps
- The trial, set for January 29, will scrutinize the SEC’s enforcement strategy and may reveal details of Jump Trading’s role in supporting Terraform’s stablecoin
Terraform Labs, the Securities and Exchange Commission (SEC), and Jump Trading are set for trial in January after a judge ruled that the SEC’s fraud case against Terraform should go before a jury. The ruling favored the SEC’s claim that Terraform sold unregistered securities but dismissed allegations of transactions in unregistered security-based swaps. The trial will be another test of the SEC’s claims over cryptocurrencies being securities, this time with a very different arbiter: a jury rather than a lone judge. The trial will also reveal details of Jump’s role as a key trader of Terraform’s algorithmic stablecoin TerraUSD and LUNA tokens.
Jump/Terraform Allegations Are “Compelling but Circumstantial”
The trial, commencing on January 29 in a Manhattan federal court, was ordered by Judge Jed Rakoff, who noted that the SEC’s evidence of Terraform’s alleged arrangement with Jump is “compelling but circumstantial.” The SEC contends that Terraform secretly collaborated with Jump to support TerraUSD a year before its collapse, but Rakoff emphasized that the jury must evaluate the credibility of Jump whistleblowers who provided key testimony.
Terraform and its co-founder Do Kwon were hit with an SEC lawsuit in February, accusing them of offering and selling unregistered securities in a fraudulent scheme that caused a market value loss of at least $40 billion. Despite the usual delay in civil suits for criminal cases, Kwon, indicted on fraud charges, remains in custody in Montenegro, following an appeal victory over the decision to extradite him.
Whistleblower Evidence Will Prove Critical
Rakoff’s ruling cited a former Jump employee turned SEC whistleblower who asserted that a Jump co-founder played a role in restoring TerraUSD’s peg to the US dollar in May 2021. The whistleblower claimed the co-founder was willing to risk $200 million to restore the peg and directed traders to control the price and quantity of TerraUSD orders.
Terraform strongly disagrees with the ruling, stating that the UST stablecoin and other tokens are not securities, the SEC’s fraud claims lack evidence. The judge did favor Terraform and Kwon on the mAssets tokens, stating they didn’t constitute security-based swaps, as investors maintained collateral levels above reference shares’ prices.
Rakoff also granted the SEC’s request to exclude testimony from two defense experts, setting the stage for a significant trial that will further examine the SEC’s pursuit of regulatory enforcement in the crypto industry.
