Terraform Labs, the US Securities and Exchange Commission (SEC), and Jump Trading are set for crypto trial next month, following a judge’s decision that the SEC’s fraud case against Terraform must proceed before a jury.
US Federal Judge Jed S. Rakoff ruled in favor of the SEC, agreeing that Terraform is responsible for selling unregistered securities. However, Rakoff dismissed allegations regarding transactions in unregistered security-based swaps. The civil trial is slated to commence on January 29 in Manhattan federal court.
This crypto trial marks a crucial test for the SEC’s assertive enforcement approach within the crypto industry. It’s anticipated to uncover further details about Jump’s involvement as a significant trader of Terraform’s algorithmic stablecoin TerraUSD and Luna tokens. The SEC contends that Terraform clandestinely engaged with the Chicago-based trading firm to bolster TerraUSD a year before its collapse.
Rakoff acknowledged the SEC’s evidence regarding the alleged arrangement as “compelling but circumstantial,” largely reliant on testimony from Jump informant whose credibility remains subject to the jury’s determination.
While Jump Trading has not faced accusations of wrongdoing in this case, the trial brings attention to informant testimony. The SEC filed a lawsuit against Terraform and co-founder Do Kwon, accusing them of offering and vending unregistered securities in a fraudulent scheme causing a market value wipeout of at least $40 billion.
Typically, regulatory civil suits wait for criminal cases to conclude. However, Kwon faces fraud charges in the US but remains in Montenegro custody due to a fake passport, also being sought after in South Korea.
Rakoff’s ruling referenced a sworn statement by a former Jump employee turned SEC informant. This individual cited a Jump co-founder, unnamed, as instrumental in restoring TerraUSD’s peg to the US dollar in May 2021. The whistleblower claimed the co-founder was willing for Jump to risk around $200 million to aid the peg’s restoration.
Moreover, the whistleblower alleged having witnessed the co-founder directing traders to adjust Jump’s trading models concerning TerraUSD’s price, quantity, and timing of orders. The co-founder declined to answer questions at a deposition, citing the Fifth Amendment.
Terraform’s spokesperson strongly disputed Thursday’s ruling, asserting disagreement with the notion of UST stablecoin and other tokens being securities. They declared the SEC’s fraud claims as unsupported and pledged a vigorous defense at trial.
Rakoff sided with Terraform and Kwon on a portion of the ruling, stating that Terraform’s “mAssets” didn’t constitute security-based swaps due to collateral requirements exceeding reference shares’ prices. As a result, the SEC’s failure to demonstrate financial risk transfer in transactions led Rakoff to exclude testimony from two defense experts.
Source: Bloomberg
