US Judge Sides with SEC in Ruling Against Do Kwon and Terraform Labs

The Terraform boss was arrested and imprisoned in Montenegro over falsified documents after being on the run to escape his fate as the alleged mastermind behind the collapse of the blockchain.

On Thursday, December 28, a US judge ruled against Terraform Labs and its CEO Do Kwon for violating federal securities laws in the lawsuit with the SEC.

The verdict comes following the collapse of the Terra (LUNA) blockchain in May 2022, leading to the depegging of its algorithmic stablecoin TerraUST from its 1:1 benchmark to the US dollar and its sister LUNA which dropped to almost zero. Subsequently, the country’s securities regulator filed a lawsuit against the firm and its CEO on February 16, 2023, alleging defrauding investors and other securities fraud.

After ten months of court battle, US District Court Judge Jed Rakoff ruled in favor of the Securities and Exchange Commission (SEC).

Decisive Ruling

In a court document dated December 28, 2023, the Judge granted a summary judgment favoring the SEC on the claim that Terraform Labs and its CEO offered and sold unregistered tokens, including TerraUST, LUNA, and MIR, to US investors without appropriate disclosure.

The court referred to a prior statement by Kwon, where he said that LUNA holders only had to “[s]it back and watch [him] kick-ass,” leading the court to conclude that LUNA met the criteria of the Howey test. The statement means that individuals could invest their money in a common enterprise and expect profits solely from the efforts of Terraform and Do Kwon.

Regarding the MIR token, the court determined that the defendants could not effectively dispute the notion that they encouraged MIR holders to anticipate profits from a common enterprise based on Terraform’s efforts in developing, maintaining, and expanding the Mirror Protocol.

For this reason, Judge Rakoff ruled that MIR has successfully passed the Howey test and, therefore, has the attributes of securities.

Judge Sides with Transform Labs

Interestingly, the Judge also sided with the defendants, Terraform Labs, on the claims involving offering and effecting transactions in security-based swaps.According to him, there is no genuine dispute that UST, LUNA, wLUNA, and MIR are securities because they are investment contracts.

In its lawsuit, the SEC claimed that Kwon and Terraform Labs facilitated transactions in security-based swaps by establishing and managing the Mirror Protocol, allowing the creation of “mAssets” by others.  However, the court has dismissed this assertion, stating that mAssets do not fall within the legal definition of a security-based swap. For clarity, M-Assets represent blockchain assets designed to mirror real-world assets by mirroring on-chain exchange prices.

The court has also dismissed Terraform Labs and Kwon’s request to exclude the testimony of two SEC experts, Dr. Bruce Mizrach and Dr. Matthew Edman, on fraud claims brought against him by the SEC. Similarly, Judge Rakoff also rejected the SEC’s motion to exclude the testimony of defense expert Dr. Terrence Hendershott on the same claims.

Meanwhile, a Montenegro court recently approved the extradition of Do Kwon to either his home country, South Korea, or the United States, where he’s facing criminal charges over the Terra(LUNA) fiasco.

The Terraform boss was arrested and imprisoned in Montenegro over falsified documents after being on the run to escape his fate as the alleged mastermind behind the collapse of the blockchain.



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