A United States federal judge has ruled in favor of the Securities and Exchange Commission (SEC) on claims that Terraform Labs and its former CEO, Do Kwon, offered and sold two unregistered securities.

The court granted summary judgment in favor of the SEC, which alleged that Terraform Labs and Kwon offered and sold LUNA, UST and MIR unregistered securities, District Court Judge Jed Rakoff stated in a Dec. 28 filing.

Judge Rakoff however granted summary judgment for the defendants over the alleged unregistered offer and sale of security-based swaps.

The SEC asserted that by creating and maintaining the Mirror Protocol through which others could mint "mAssets," Kwon and Terraform Labs offered and effected transactions in security-based swaps. But the court rejected this argument, ruling that mAssets don't meet the statutory definition of a security-based swap.

M-Assets are blockchain assets that act as “mirrors” of real-world assets by reflecting on-chain exchange prices.

The court cited a previous comment from Kwon, stating that LUNA holders simply need to “[s]it back and watch [him] kick ass" to conclude LUNA satisfied the Howey test. "In other words, a person could invest their “money in a common enterprise” and be “led to expect profits solely from the efforts of the promoter or a third party,” namely, Terraform and Do Kwon himself," the court ruled.

Regarding the MIR token, the court ruled that the defendants could not meaningfully dispute that they led MIR holders to expect profit from a common enterprise based on Terraform’s efforts to develop, maintain, and grow the Mirror Protocol.

"In other words, that MIR passes the Howey test with flying colors."

In addition, the court denied the Terraform Labs and Kwon's motion to exclude the testimony of two SEC experts, Dr. Bruce Mizrach and Dr. Matthew Edman. 

However, it also rejected the securities regulator's motion to exclude the testimony of defense expert Dr. Terrence Hendershott.

The SEC claims Kwon orchestrated a fraudulent cryptocurrency scheme which wiped out at least $40 billion of market value in 2022. However the court denied both sides' motions for summary judgment on the SEC's fraud claims.

The fraud claims will be decided in a jury trial starting in January. Jury selection set to take place on Jan. 24, 2024.

A Terraform Labs spokesperson told Cointelegraph that they disagree with the court's ruling and is preparing to "vigorously" defend the SEC's fraud claims at trial:

“We strongly disagree with the decision and do not believe that the UST stablecoin or the other tokens at issue are securities. Further, the SEC’s fraud claims are not supported by evidence, and we will continue to vigorously defend against those meritless allegations at trial.”

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