Terraform Labs, Do Kwon file motion to dismiss SEC lawsuit

Terraform Labs and its co-founder Do Kwon filed a motion for summary judgment with a federal court, asking the judge to dismiss the SEC’s securities fraud lawsuit against it.

Terraform Labs collapsed in May 2022 after its native token LUNA lost 99% of its value when the linked algorithmic stablecoin UST lost its peg to the dollar. The event caused more than $60 billion in losses for investors and has led to lawsuits in multiple countries, including South Korea and the U.S.

Kwon was arrested in Montenegro in 2023, where he is currently serving a four-month sentence for the use of forged documents. Both the U.S. and South Korea are seeking extradition so he can be prosecuted for his role in the collapse.

Motion to dismiss

Terraform argued in the filing that the SEC had failed to prove that Terraform Labs was selling securities or committing fraud. The company claims that the regulator has provided no evidence to back any of the allegations made in the lawsuit.

According to the filing:

“After two years of investigation, the completion of a discovery period that resulted in the taking of more than 20 depositions, and the exchange of over two million pages of documents and data, the SEC is evidentiarily no closer to proving that the defendants did anything wrong.”

Additionally, the company raised concerns about the regulator using an analysis conducted by a Rutgers University economics professor as the basis for its lawsuit as it is “conceptually and methodologically flawed.”

The Mizrach Report — named after the author Bruce Mizrach — claims that the UST re-peg in 2021 was caused by the activity of a “Trading Firm” that was in partnership with Terraform Labs.

However, Terraform argues that the SEC has no admissible evidence to support this claim. The company further stated:

“Some of the SEC’s analytical modeling, particularly with respect to Professor Mizrach’s opinions, yield such absurd results that they are the kind of “junk science” that has been repeatedly condemned by the Supreme Court and the Second Circuit.”

It is unclear whether the motion — filed with Judge Jed Rakoff of the U.S. District Court for the Southern District of New York — will be granted. Terraform’s previous attempt to have the case dismissed was unsuccessful.

Terraform co-founder trial

Meanwhile, the trial of Terraform Labs co-founder Daniel Shin began in South Korea on Oct. 30. Shin is facing charges of illegal fundraising and violating capital market laws.

Shin denied all charges against him and said the collapse was mainly caused by Kwon’s “unreasonable” management of Anchor Protocol — a DeFi lending protocol that allowed users to borrow and lend UST.

Shin defended himself by stating that he severed ties with Kwon back in 2020 and, therefore, should not be blamed for the failure of the Terra ecosystem.

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