Terraform Labs says bankruptcy helps afford appeal against SEC’s fraud lawsuit

Terraform Labs’ Chapter 11 bankruptcy protection would allow the company to pursue an appeal against the U.S. Securities and Exchange Commission’s securities fraud lawsuit, the company said in a Tuesday filing.

“[The bankruptcy protection] is critical to the Debtor’s ability to operate as a going concern, preserve value for its creditors and stakeholders (including the Terra LUNA -4.01% community), provide an orderly process for resolving competing claims against it, and pursue an appeal of the SEC Enforcement Action,” wrote Terraform Labs CEO Chris Amani in the filing . 

The company filed for Chapter 11 bankruptcy in the U.S. Bankruptcy Court for the District of Delaware on Jan. 21, with estimated assets and liabilities between $100 million and $500 million. The first day hearing for the bankruptcy filing is set to take place on Wednesday in the U.S.

Amani said that due to the size of the potential money judgment, the company “would likely not be able to satisfy such judgment nor would it be able to post the supersedeas bond necessary for an appeal.” 

“Without the protection of chapter 11, the Debtor would likely have to liquidate after the trial and entry of final judgment,” he said, adding that a successful appeal of the SEC’s claims would reduce Terraform’s liabilities and potentially lead to positive financial outcomes for the debtor, creditors and the community. 

The SEC charged the firm and then-CEO Kwon Do-hyeong with securities fraud in February 2023, saying the team orchestrated a "multi-billion dollar crypto asset securities fraud" while also raising billions from investors by "offering and selling an inter-connected suite of crypto asset securities, many in unregistered transactions."

The current Terra CEO also reiterated the firm’s argument against the SEC’s fraud claim. “The Debtor disagrees with the District Court’s summary judgment decision and believes it should be reversed because the cryptocurrency tokens at issue are not securities under the Acts, and the SEC Enforcement Action therefore lies outside the SEC’s jurisdiction,” Amani said in the filing.

Judge Jed Rakoff in the U.S. District Court for the Southern District of New York previously sided with the SEC’s claim that Terra offered unregistered securities, in December’s summary judgment. 

Terraform Labs is the company behind the algorithmic stablecoin TerraUSD and sister cryptocurrency Luna, both of which infamously collapsed in May 2022. Former chief Kwon was arrested in March last year in Montenegro for attempting to travel with false documents. The former Terra chief is awaiting his extradition from the country, while the U.S. District Court for the Southern District of New York pushed back SEC’s trial against Terraform and Kwon to late March at Kwon’s request.