Terraform Labs cites SEC’s alleged misrepresentations in DEBT box case in its own bid for summary judgment

Terraform Labs, facing a securities lawsuit from the U.S. Securities and Exchange Commission (SEC), made a request on Dec. 4, 2023, for a summary judgment to conclude the case.

Citing the treatment of a separate firm, DEBT Box, in ongoing SEC litigation, the defense pointed out that the regulatory body had misrepresented facts in that case, according to the presiding judge.

The U.S. Securities and Exchange Commission (SEC) originally sued Terraform Labs and its co-founder in Do Kwon in February 2023. The SEC alleged that the defendants raised billions of dollars by selling unregistered securities prior to the collapse of the project and the devaluation of its cryptocurrencies.

In October, Terraform Labs initiated a motion for summary judgment following a failed motion to dismiss the case. Terra’s legal team now says another SEC case supports its request for summary judgment.

That separate case concerns an unrelated firm called Digital Licensing Inc. (dba DEBT Box), in which a judge criticized the SEC’s actions. According to Terra’s legal representation, Judge Robert J. Shelby found that the SEC had “made misrepresentations to the Court that were so serious that the Court ordered the SEC to show cause why it should not be sanctioned.”

The latest filing says the DEBT Box case has implications for the SEC’s “general use of excerpts of evidence” in the Terra case. It also has implications for one part of the SEC’s amended complaint, which says that Terraform Labs and Kwon retain control over or have moved funds (as detailed in paragraph 173 of that complaint).

Details of the DEBT Box case

According to a report from Fortune on Dec. 1, the SEC alleged this summer that DEBT Box defrauded investors of $50 million by selling unregistered securities.

The U.S. Securities and Exchange Commission (SEC) initially obtained a temporary restraining order and asset seizure against a crypto firm through an ex parte application, a one-sided proceeding where the firm could not challenge the proceedings. This is generally used when there’s a concern about evidence being destroyed or assets being moved overseas. The SEC alleged that the firm was actively closing bank accounts to move operations to Abu Dhabi, out of U.S. jurisdiction.

However, U.S. District Judge Robert Shelby later found these allegations to be false, finding that accounts had been closed in the specified 48-hour window and that the company had already relocated most operations months earlier. The judge expressed concern over the SEC’s misrepresentation as well as its failure to correct the error.

A filing indicates that the restraining order was previously dissolved at the request of the defendants. The latest development could see the court impose sanctions on the SEC, though it is unclear what those sanctions might include.