Terraform Labs seeks to dismiss class action arguing US laws don’t apply

Federal securities laws only apply in the United States, but the protocols were developed overseas, argues Terraform Labs.

Terraform Labs is seeking to have a class action lawsuit against the firm dismissed, arguing the United States securities laws referenced are not applicable to its foreign-developed protocols. 

On May 3, Terraform Labs requested a California federal judge dismiss an investor suit brought by Nick Patterson that claimed the company sold unregistered securities and misled investors.

The firm’s attorneys, Dentons, argued that federal securities laws do not apply since the protocols were developed and used outside of the United States.

The Terra/Luna ecosystem collapsed in May 2022, wiping out billions from the crypto markets. The crash has sparked a raft of lawsuits against the firm, associated entities such as the Luna Foundation Guard, and company founder Do Kwon.

In June 2022, this particular class action was filed, claiming that the Terra tokens (UST and LUNA) were securities, among other allegations.

According to Law360, Terraform’s dismissal motion argued that federal securities laws and the mail and wire fraud accusations in the suit only apply domestically.

“The federal securities laws do not apply because the SAC [Second Amended Complaint] does not allege that any of the protocols at issue were developed domestically.”

The same argument also applies to the suit’s RICO (Racketeer Influenced and Corrupt Organizations) allegations, which claimed the firm’s goal was to reap profits at retail investors’ expense, according to Terraform.

Nick Patterson, who filed the suit on behalf of investors, did not adequately plead that mail and wire fraud allegations occurred domestically, it argued.

The motion also states that the plaintiff failed to identify the location of digital wallets containing his Terra tokens, which negates any “domestic injury” claims, according to Terraform.

Related: Do Kwon converted illicit funds from LUNA to Bitcoin: S.Korean prosecutors

Terraform and Do Kwon were sued by the Securities and Exchange Commission in February, with the regulator claiming they orchestrated a multibillion-dollar securities fraud.

In April, a South Korean court ruled that LUNA was not a security under the country’s Capital Markets Act.

On April 25, Terraform Labs co-founder Hyun-seong Shin and nine individuals associated with the firm were indicted in South Korea.

They were reportedly indicted on charges of fraud, breach of trust and embezzlement and referred to trial following almost a year of investigation.

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