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(Kitco News) -
Terraform Labs, the company behind the Terra/Luna stablecoin pair whose collapse led to a series of cascading bankruptcies and the onset of the ‘crypto winter’, is petitioning to have a U.S. class action lawsuit dismissed.
The class action was filed by investor Nick Patterson in June 2022, claiming that Terraform Labs’ algorithmic stablecoin tokens UST and LUNA were actually securities, and that the company committed racketeering, mail and wire fraud.
On May 2, the firm’s attorneys filed a motion to dismiss the suit in a California federal court, challenging the jurisdictional and legal applicability of each of Patterson’s allegations in turn.
“Federal securities law, the mail and wire fraud statutes, and RICO [the Racketeer Influenced and Corrupt Organizations Act] apply domestically, not extraterritorially,” they wrote. “Lead Plaintiff’s securities claims based on his acquisition of UST challenge conduct that is not domestic: The federal securities laws do not apply because the SAC does not allege that any of the protocols at issue were developed domestically, that any challenged statements by Defendants were made in the U.S., or even that Lead Plaintiff’s UST purchase was made in the U.S.”
The lawyers also argued that the Plaintiff’s mail and wire fraud allegations “are not sufficiently domestic” to support a RICO claim, saying that claiming Terraform used U.S. wires to communicate or send and receive money are not enough. “[A]llegations that racketeering conduct was directed from or to the United States are necessary,” they wrote.
The lawyers’ challenge of Patterson’s allegation that the Luna and Terra tokens are securities relies on the now-familiar criticisms that crypto firms have been leveling at the SEC for years.
“Lead Plaintiff’s attempt to rely on the SEC’s allegations regarding the ‘Terra Tokens’ being securities is fatal,” they wrote. First off, they say Patterson cannot simply base his claim on the SEC’s allegations. Secondly, “the SEC is wrong and [the Howey test] does not apply to digital assets.” And finally, Patterson “does not adequately plead that any specific ‘Terra Token’ satisfies the Howey test.”
Do Kwon, the founder and CEO of Terraform Labs, and the company’s chief financial officer Han Chang Joon Kwon, were arrested at the airport in Montenegro's capital city of Podgorica on March 23 after being caught attempting to travel to Dubai under fake Costa Rican traveling documents.
Kwon fled his native South Korea following the collapse of the Terra ecosystem in May 2022, with a South Korean court issuing an arrest warrant on Sept. 17 and Interpol issuing a Red Notice two weeks later.
On Feb. 17, 2023 the U.S. Securities and Exchange Commission (SEC) charged Do Kwon with securities fraud, writing that Kwon and Terraform orchestrated “a multi-billion dollar crypto asset securities fraud involving an algorithmic stablecoin and other crypto asset securities.”
If Terraform’s motion to dismiss the class action suit fails, it will be heard by federal judge Trina L. Thompson on September 19, 2023 in San Francisco.
