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

Terraform Labs argued that there was no contract in the sale of UST to retail investors.

AccessTimeIconJul 31, 2023 at 9:13 p.m. UTC
Updated Aug 1, 2023 at 3:17 p.m. UTC
  • A federal judge denied Terraform Labs' motion to dismiss an SEC lawsuit.
  • The judge also said he rejected the use of a ruling from another judge who ruled that Ripple did not violate securities law in selling XRP to retail investors through an exchange intermediary.

A federal judge denied stablecoin issuer Terraform Labs' motion to dismiss a lawsuit from the U.S. Securities and Exchange Commission (SEC) on Monday, saying the regulatory agency has sufficiently argued it has jurisdiction and "asserted a plausible claim" that TerraUSD (UST), the Anchor Protocol and LUNA may have violated securities law.

More importantly, perhaps, Judge Jed Rakoff, of the U.S. District Court for the Southern District of New York, also rejected the use of 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.

The SEC sued Terraform and founder Do Kwon earlier this year on charges of misleading investors about 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.

"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."

The SEC has already hinted that it may appeal the ruling.

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.

The judge also rejected Terraform Labs' "major questions doctrine" objection. The doctrine stems from a Supreme Court ruling which functionally blocks regulatory agencies from dramatically exceeding their mandate, and is an argument a number of crypto defendants have invoked against the SEC, including crypto exchange Coinbase.

"As the doctrine’s name suggests and the Supreme Court has, in case after case, emphasized, the Major Questions Doctrine is intended to apply only in extraordinary circumstances involving industries of 'vast economic and political significance,'" he wrote. "This question, moreover, of whether an industry subject to regulation is of 'vast economic and political significance' should not be resolved in a vacuum. Rather, an industry can be considered to have 'vast economic and political significance' only if it resembles, in these two qualities, the industries that the Supreme Court has previously said meet this definition."

The cryptocurrency industry "falls far short" of this standard, he wrote.

The price of XRP fell around 2% after the ruling was published, dropping as low as $0.69 after reaching an intraday high of $0.72. It was trading around $0.70 as of press time.

UPDATE (July 31, 2023, 21:35 UTC): Adds additional detail.

UPDATE (July 31, 22:15 UTC): Adds further information on judge's rejection of the Major Questions Doctrine argument.


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Nikhilesh De

Nikhilesh De is CoinDesk's managing editor for global policy and regulation. He owns marginal amounts of bitcoin and ether.

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