New York Judge Orders Terraform Labs to Comply With SEC's Investigative Subpoenas

A recent court filing stemming from the Southern District of New York shows that a U.S. district judge has ordered the crypto startup Terraform Labs to comply with the Securities and Exchange Commission’s (SEC) subpoenas. During the second week of November 2021, the U.S. regulator filed a subpoena enforcement action against Terraform Labs and the startup’s CEO, Do Kwon.

U.S. Regulator Gets New York Judge to Side With Investigative Subpoenas Plea

On February 17, 2022, a court order signed by the United States district judge J. Paul Oetken details that the startup Terraform Labs must comply with the SEC’s investigative subpoenas. In mid-November last year, the SEC filed subpoenas that attempted to compel Terraform Labs and its CEO Do Kwon to comply with the “fact-finding investigation.”

The investigation is due to Terraform Lab’s Mirror Protocol, an application that was launched in 2020, allowing users to trade mirrored assets tied to the price of U.S. securities. The SEC wants Terraform Labs and Kwon to explain why the court “should not compel them to produce documents as required by the subpoenas and compel Kwon to appear for testimony.”

A month prior to the enforcement action by the SEC, in October, Terraform Labs and Kwon revealed they were suing the U.S. regulator over serving the CEO the subpoena at a conference in New York. Terraform Labs (TFL) and Kwon insisted that the SEC lacks jurisdiction over the companies and the subpoenas were not served through the proper channels. The lawsuit against the SEC states:

The SEC attorneys were well aware that TFL and Mr. Kwon had consistently maintained that the SEC lacked jurisdiction over TFL and Mr. Kwon, and at no time asked Dentons lawyers whether it was authorized to accept service of subpoenas.

New York Judge: ‘Terraform and Kwon Are Hereby Ordered to Comply With the Referenced Subpoenas’

Despite the lawsuit against the SEC, last Thursday the Southern District of New York judge J. Paul Oetken ordered TFL and Kwon to comply with the regulator’s subpoenas. After the court had reviewed all the filings between both parties and listened to an oral argument by telephone conference, Oetken granted the SEC its wishes.

“For the reasons stated on the record at the February 17, 2022 conference, the SEC’s application is granted, and Terraform and Kwon are hereby ordered to comply with the above-referenced subpoenas,” Oetken’s order explains. The court filing adds:

This order is stayed for 14 days to permit further briefing regarding a potential stay pending any appeal of this order.

Mirror Protocol is still operational today and is the fifth-largest decentralized finance (defi) protocol on the Terra blockchain today. At the time of writing, the synthetics protocol for on-chain price exposure to real-world assets has $587.34 million total value locked (TVL). The SEC accuses TFL and Kwon of participating in “the creation, promotion and offer to sell assets and MIR tokens to U.S. investors.”