Terraform, SEC set for crypto trial with Jump Trading in spotlight

TERRAFORM Labs and the US Securities and Exchange Commission (SEC) will head to trial next month, with Jump Trading swept up in the mix, after a judge ruled that the SEC’s fraud case against Terraform must be tried by a jury.

US District Judge Jed Rakoff ruled in favour of the regulator on Thursday (Dec 28), agreeing that Terraform is liable for selling unregistered securities, though he threw out allegations that it had made transactions in unregistered security-based swaps.

The civil trial is set to begin on Jan 29 in Manhattan federal court.

The trial will be a test of the SEC’s aggressive enforcement strategy across the crypto industry. It is also likely to reveal fresh details of Jump’s role as a key trader of Terraform’s algorithmic stablecoin TerraUSD and Luna tokens. The SEC claims Terraform secretly entered into an arrangement with the Chicago-based trading company to prop up TerraUSD a year before it collapsed.

In his ruling, Rakoff said the SEC’s evidence about the alleged arrangement is “compelling but circumstantial, relying in large part on the testimony of Jump whistleblowers whose credibility the jury will need to determine”.

Jump has not been accused of any wrongdoing in the case.

The regulator sued Terraform and co-founder Kwon Do in February, alleging they offered and sold unregistered securities as part of a fraudulent scheme that wiped out at least US$40 billion in market value. 

Regulatory civil suits are usually delayed to allow criminal cases to play out in court first. But while Kwon has been indicted on fraud charges in the US, he is still in custody in Montenegro, where he was caught travelling with a fake passport. Kwon is also wanted in his native South Korea. 

Rakoff’s ruling cited a sworn declaration by a former Jump employee-turned-SEC whistleblower that a co-founder of Jump, who was not identified, played a part in the company’s decision to restore TerraUSD’s peg to the US dollar in May 2021.

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Jump was founded in 1999 by Paul Gurinas and Bill Disomma, who met in the Deutsche Mark pit at the Chicago Mercantile Exchange. 

The whistleblower had heard Jump’s co-founder say “he was willing for Jump to risk about US$200 million to help restore the peg”, according to the document. The whistleblower also claimed to have seen Jump’s co-founder direct traders “to adjust the parameters of the (Jump) trading models to control the price, quantity and timing of UST orders”, referring to TerraUSD.

Days after TerraUSD returned to its US$1 peg, the whistleblower recalled hearing Jump’s co-founder advising the Jump crypto team to “not cause another de-peg by selling too quickly”. 

At a deposition, the Jump co-founder declined to answer questions, invoking his right against self-incrimination under the US Constitution’s Fifth Amendment. 

A Jump spokesperson declined to comment on the declaration. 

A Terraform spokesperson said the company strongly disagrees with Thursday’s ruling and does 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,” the spokesperson said in a statement.

In the portion of the judge’s ruling that favoured Terraform and Kwon, Rakoff said Terraform’s “mAssets” – tokens with value that mirrored the price of non-crypto assets including public securities – did not constitute security-based swaps because investors were required to maintain collateral levels above the price of reference shares.

As a result, the judge said, the SEC failed to show how any financial risk would be transferred to a counterparty in a transaction, which is a requirement for a security-based swap.

Rakoff granted the SEC’s request to exclude testimony from two defence experts.