Judge Rejects Ripple Ruling Precedent in Denying Terraform Labs’ Motion to Dismiss SEC Lawsuit

By coindesk.com August 01, 2023 In Bitcoin, Ripple, TerraUSD

A federal judge denied stablecoin issuer Terraform Labs’ motion to dismiss a lawsuit from the U.S. Securities and Exchange Commission (SEC) on Monday.

More importantly, perhaps, Judge Jed Rakoff, of the U.S. District Court for the Southern District of New York, also rejected a ruling from fellow Judge Analisa Torres, who recently ruled that Ripple Labs – another defendant against the SEC – did not violate securities law in making XRP available on secondary platforms for retail investors to purchase.

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The SEC sued Terraform and founder Do Kwon earlier this year on charges of misleading investors about TerraUSD (UST), a stablecoin pegged to the U.S. dollar through the LUNA token, and fraud.

In a motion to dismiss, Terraform argued that people bought UST for practical purposes and did not have an expectation of it being an investment. Earlier this month, attorneys for Terraform also pointed to the recent Ripple ruling, in which Judge Torres said that while Ripple had violated securities laws in selling XRP to institutional investors, retail investors could not have known they were purchasing XRP from Ripple because they bought the token on intermediary exchanges through Ripple’s programmatic sales.

In his order Monday, Judge Rakoff said he rejected that approach.

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“Whatever expectation of profit they had could not, according to that court, be ascribed to defendants’ efforts,” he wrote. “But Howey makes no such distinction between purchasers. And it makes good sense that it did not. That a purchaser bought the coins directly from the defendants or, instead, in a secondary resale transaction has no impact on whether a reasonable individual would objectively view the defendants’ actions and statements as evincing a promise of profits based on their efforts.”

During the motion to dismiss stage, the facts in the SEC’s complaint must be assumed to be true, he noted, and the SEC said in its filing that Terraform had “embarked on a public campaign to encourage both retail and institutional investors” to buy UST.

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