One of the most high-profile cases of total collapse in the crypto industry ever, Terraform Labs’ sudden implosion last year, left government regulators in both South Korea and the USA scrambling to sort out the mess.
While Korean authorities continue to probe into the dealings of TFL’s former C-suite and those of the exchange they ran, the platform’s legal team in the U.S. attempted to capitalize on Ripple’s recent headway against the SEC.
However, Judge Jed Rakoff was not convinced.
Purchasers Expected Profit From Their Transactions
According to Judge Rakoff, the Howey test – which requires buyers in an investment contract to expect a profit derived from the efforts of others – qualifies tokens minted on the Terraform Blockchain as securities.
Furthermore, the Judge added that both retail and institutional investors had this expectation, nixing the argument that those purchasing tokens from secondary markets were not buying securities.
“Simply put, secondary-market purchasers had every bit as good a reason to believe that the defendants would take their capital contributions and use it to generate profits on their behalf.”
Judge Rakoff continued by stating that the court disregards the decision taken by Judge Torres, considering the distinction irrelevant.
Legal Precedent Disregarded
Although the U.S. legal system – and those of most countries worldwide – apply the law in precedent, Judge Rakoff decided to break with tradition and deny the application of legal precedent for Terraform Labs’ attempt to dismiss the court case filed by the SEC against them.
“The court declines to draw a distinction between these coins based on their manner of sale, such that coins sold directly to institutional investors are considered securities and those sold through secondary market transactions to retail investors are not. In doing so, the court rejects the approach recently adopted by another judge of this district in a similar case.”
However, Judge Rakoff’s decision may have consequences for Ripple Labs’ court case too.
Since the SEC mulls filing an appeal against Judge Torres’ decision to partially exonerate Ripple Labs, it’s quite possible that the agency will quote Judge Rakoff’s ruling, allowing for a potential overturning in the case against Ripple itself.
If so, Ripple may be back on the docket shortly, prolonging its legal battle by another few years.