A forthcoming trial between Terraform Labs and the US Securities and Exchange Commission (SEC) is poised to put the spotlight on Jump Trading. Following a judge’s decision to proceed with a jury trial for the SEC’s fraud case against Terraform, the stage is set for an upcoming legal showdown.
US District Judge Jed S. Rakoff recently sided with the regulator, affirming Terraform’s liability for selling unregistered securities. However, the judge dismissed claims of engaging in transactions involving unregistered security-based swaps. The civil trial is slated to commence on January 29 in a Manhattan federal court.
This legal battle will not only serve as a litmus test for the SEC’s assertive approach within the crypto sphere but is expected to uncover new insights into Jump Trading’s involvement as a significant trader of Terraform’s algorithmic stablecoin, TerraUSD, and Luna tokens. The SEC alleges that Terraform clandestinely struck a deal with the Chicago-based trading firm to support TerraUSD a year before its collapse.
Judge Rakoff highlighted that the SEC’s evidence regarding the alleged arrangement heavily relies on circumstantial factors, primarily the testimony of Jump whistleblowers. The credibility of these witnesses will be left to the jury to ascertain.
It’s important to note that Jump Trading hasn’t faced any accusations of wrongdoing in this case.
The SEC initiated legal action against Terraform and its co-founder, Do Kwon, in February, alleging the offering and sale of unregistered securities as part of a fraudulent scheme that led to the wipeout of at least $40 billion in market value.
Typically, regulatory civil suits are delayed pending the outcome of criminal cases. However, while Kwon faces fraud charges in the US, he remains in custody in Montenegro after being apprehended with a fake passport. He is also wanted in his home country of South Korea.
Judge Rakoff’s ruling cited a sworn statement from a former Jump employee turned SEC whistleblower, implicating a co-founder of Jump (not named) in the decision to restore TerraUSD’s peg to the US dollar in May 2021. Jump Trading was established in 1999 by Paul Gurinas and Bill Disomma, who met at the Chicago Mercantile Exchange’s Deutsche Mark pit.
According to the whistleblower’s account, the Jump co-founder allegedly expressed a willingness for Jump to risk approximately $200 million to support re-establishing the TerraUSD peg. Moreover, the whistleblower claimed to have witnessed the co-founder instructing traders to modify Jump’s trading models to manage the price, quantity, and timing of UST orders (referring to TerraUSD).
Shortly after TerraUSD returned to its $1 peg, the whistleblower recounted hearing the Jump co-founder advising the Jump crypto team to avoid triggering another depeg by selling too rapidly.
During a deposition, the Jump co-founder declined to answer questions by invoking the Fifth Amendment, which safeguards against self-incrimination under the US Constitution.
A spokesperson for Jump declined to comment on the whistleblower’s declaration, while a Terraform spokesperson vehemently opposed Thursday’s ruling, asserting that the UST stablecoin and other tokens in question are not securities. Additionally, they contested the lack of evidence supporting the SEC’s fraud allegations, vowing to vigorously defend against them during the trial.
Judge Rakoff’s ruling favored Terraform and Kwon in the aspect concerning Terraform’s “mAssets,” contending that these tokens, mirroring the value of non-crypto assets like public securities, didn’t constitute security-based swaps. This conclusion was drawn as investors were mandated to maintain collateral levels above the price of reference shares, negating the transfer of financial risk to a counterparty—an essential criterion for a security-based swap.
Consequently, the judge granted the SEC’s plea to exclude testimony from two defense experts.
