SEC Uses Recent Ruling In Separate Litigation AGAINST Binance

By Vince • January 4, 2024 10:51 am • Comments

The Securities and Exchange Commission’s recent case against Terraform spells trouble for Binance.

After the judge sided with the SEC and ruled that Terraform had, indeed, sold unregistered securities this set a dangerous precedent for the crypto industry and all ensuing litigation between U.S. regulators and crypto firms.

Now we are seeing reports that the SEC intends to use this precedent in its case against Binance. Recall that the SEC asserts that BUSD is a security.

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Never mind that the stablecoin is literally pegged to the value of the U.S. dollar and is used as liquidity to shift funds.

In no way, shape, or form can BUSD be considered an investment contract. Perhaps some of the perks surrounding holding BUSD might need to change, but it’s hard to imagine how something pegged to the value of the dollar at 1:1 parity can be considered an investment. Despite this, the SEC marches on. Here’s what we know:

Former SEC Chief John Reed Stark explained: “Yet Another Mammoth US SEC Crypto-Victory. This Time in the US SEC/Terra Litigation in the SDNY. The US SEC Has Now Amassed a Track Record of Close to 200 Judicial and Administrative Crypto-Related Enforcement Wins Since 2013.

Among other rulings, US District Judge Jed Rakoff held this past week that Terra and its founder, Do Kwon, violated federal laws by offering and selling unregistered securities such as TerraUSD (UST), LUN, wLUNA, and MIR.

Per the 71-page decision written by arguably the most respected U.S. Judge in history when opining on, and adjudicating, questions relating to the U.S. securities laws:

“There is no genuine dispute that UST, LUNA, wLUNA, and MIR are securities because they are investment contracts.The SEC argues that four of Terraform’s crypto assets –- UST, LUNA, wLUNA, and MIR –- are securities, as defined in Section 2(a)(1) of the Securities Act for the purposes of the federal securities laws, because they are “investment contract[s].” 15 U.S.C. § 77b(a)(1).

Defendants first argue that, even if all the SEC’s allegations are credited, those assets are not investment contracts as a matter of law. In the alternative, defendants contest the SEC’s assertion that undisputed facts do indeed demonstrate that the crypto assets here at issue are investment contracts.

Defendants’ first argument in effect asks this Court to cast aside decades of settled law of the Supreme Court and the Second Circuit. In the seminal decision of SEC v. W.J. Howey Co., 328 U.S. 293 (1946), the Supreme Court held in no uncertain terms that “an investment contract for purposes of the Securities Act means a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party.” Id. at 29899.

Defendants urge this Court to scrap that definition, deeming it “dicta” that is the product of statutory interpretation of a bygone era.8 The Court declines defendants’ invitation.

Howey’s definition of “investment contract” was and remains a binding statement of the law, not dicta. And even if, in some conceivable reality, the Supreme Court intended the definition to be dicta, that is of no moment because the Second Circuit has likewise adopted the Howey test as the law. See, e.g., Revak v. SEC Realty Corp., 18 F.3d 81, 87 (2d Cir. 1994).

There is no genuine dispute that the elements of the Howey test –- “(i) investment of money (ii) in a common enterprise (iii) with profits to be derived solely from the efforts of others” (id.) –- have been met for UST, LUNA, wLUNA, and MIR.”

Coin Paprika confirmed:

The SEC filed a notice on January 3, asking the court to consider the decision from the SEC v. Terraform Labs case in its lawsuit against Binance and its executives.

One individual wrote: “The SEC’s introduction of the Terra ruling in the Binance lawsuit is a desperate attempt to expand their jurisdiction and control over the cryptocurrency industry, further stifling innovation and hindering progress. It’s disappointing to see the SEC relying on outdated legal principles instead of embracing the potential of digital assets.”

Bitcoinist provided some of the SEC’s filing citing the importance of the Terraform precedent:

In their filing, the SEC emphasizes, “The opinion is accordingly relevant to the court’s consideration of defendants BAM Trading Inc.’s and BAM Management US Holdings Inc.’s motion to dismiss.”

This statement underlines the SEC’s stance that the Terra ruling should influence the court’s decision on whether to dismiss Binance’s motion.

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