SEC turns up the heat on crypto in probe into Singapore-based Terraform Labs

SEC turns up the heat on crypto in probe into Singapore-based Terraform Labs
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(Nov 13): The US Securities and Exchange Commission (SEC) ratcheted up its investigation into Terraform Labs, a Singapore-based crypto firm that offers digital tokens mirroring US-traded stocks as it seeks to extend its control over the industry.

The SEC, which is looking into whether Terraform’s Mirror Protocol violates laws including the prohibition on selling unregistered securities, asked a judge on Friday (Nov 12) to order the company and its chief executive officer Do Kwon to turn over documents and provide testimonies. The agency said it is seeking to enforce investigative subpoenas after efforts broke down to get the material voluntarily.

“With no legitimate basis, respondents Terraform and Kwon have refused to produce documents and respondent Kwon has refused to testify in response to two Commission subpoenas,” the SEC said in papers filed in the Federal Court in Manhattan. They “should not be permitted to thwart the Commission’s investigation”, the regulator argued.

Kwon, a resident of South Korea, and Terraform sued the SEC last month, claiming the SEC’s method of serving the subpoenas on him at a New York crypto industry conference violated SEC rules and his rights under the US Constitution.

“The SEC does not address its failure to follow its own rules, and its filings do not deny that it failed to obtain a specific order authorising service on Do,” Terraform said in a statement on Friday. “Ultimately, the court will decide whether the SEC acted properly.”

US sway

The subpoenas are part of an effort by US authorities to assert their sway over crypto companies, including those based abroad, with claims they are violating US law. Terraform’s Mirror Protocol offers synthetic versions of stocks traded on US exchanges, such as Tesla Inc and exchange-traded funds like the Ark Innovation ETF (exchange traded fund). 

The SEC is seeking documents shedding light on Terraform’s marketing and promotion of the Mirror Protocol and the crypto assets, its control of protocol agreements with third parties on the sale of tokens, its communications with investors and its organisational chart. 

Friday’s filing came after months of fruitless attempts to negotiate with Terraform, according to the SEC. The talks were capped by a process server handing the subpoenas to Kwon in September as he stepped off an escalator in a Times Square hotel on his way to address the crypto conference, the company said. 

In May, Kwon consented to an interview requested by the SEC’s enforcement division, the company said. After the interview, the SEC sought documents from Kwon and the company in a request that Terraform claims were overly broad.

The case is US Securities and Exchange Commission versus Terraform Labs Pte Ltd, 21-mc-00810, US District Court, Southern District of New York (Manhattan).