Terraform Labs Crypto Trial
Begins with Talk of UST Death
Spiral and Do Kwon in Montenegro
by
Matthew Russell Lee, Patreon Book
Substack
SDNY
COURTHOUSE,
March 25 – The SEC's trial
against Terraform Labs
began on March 25. Inner City
Press was there, thread. On
November 17, 2023 US District
Court for the Southern
District of New York Judge Jed
S. Rakoff held a hearing on
potential trial experts. Inner
City Press live tweeted that
too, thread.
From March
25, thread:
...Witness is on
stand, bought $188,000 of UST
on Gemini in Feb-March 2022
Terraform
lawyer's Q: So UST and Anchor
are two different things,
right?
Witness /
professor: Right. Q: How do
you describe staking? Witness:
You earn a yield. Q: You were
hoping for 20% returns, by
staking your UST? Witness:
That was my idea.
Q: On
direct you said there was no
risk in a stable coin?
Witness: If it's a proper
stable coin. Q: Putting on
your professor's hat- Judge
Rakoff: He's a lay witness,
not an expert. Q: OK. Risk is
supposed to match reward,
right? Witness: To some
degree.
h Q: A 20% return
is high - so, it must be
risky, right? Witness: They
had to come up with the 20%
somehow. Q: The money has to
be deployed to earn that 20%-
SEC lawyer:
Objection!
Judge Rakoff: I
sustain on what I just said,
he's a percipient witness, not
an expert
Terraform Labs'
lawyer: I have an argument,
but not in front of the
jury... Judge Rakoff: Come to
the sidebar. [Whispered
sidebar begins]
They're
back. Q: I want to show you
plaintiff's exhibit 79, please
show the jury [On
screen, at stablekwon 's
March 15, 2021 tweet saying
"target" 20%] Q: You put all
of your UST into the Anchor
protocol? Witness: Yes.
Q: You'd go
to the Terraform website and
open a wallet and link to
Anchor? Witness: Correct. You
just connect your wallet to
the Anchor protocol. Q:
You had to accept the terms of
service? Witness: There were
no terms of service at the
time. None that I accepted
Q: Let's look at
DX 347 - are these the Terra
terms of service? SEC lawyer:
Objection! Judge: Sustained.
Q: OK then, DX 43... You found
the information on Terra's
Medium? Witness: Yes.
SEC lawyer: Objection -
foundation. Judge: Overruled
[On screen:
"Formation of Luna Foundation
Guard (LFG)" - including "The
rise of decentralized
stablecoins has not come
without criticism"-] SEC:
Objection! This is just
hearsay! Judge: Jurors, this
is not being offered for the
truth of what it says, but its
effect
Q: Did you
see this? Witness: I'm sure I
did. [Terra's cross examiner
goes and huddles with four
other defense lawyers,
including at least one who
does criminal defense too] Q:
Did you check a box on Gemini?
Witness: Yes. SEC lawyer:
Objection! Relevance!
Judge: If
you ask a question about this
document, the objection will
be sustained. Terra's lawyer:
Then I won't waste our time.
Judge Rakoff: Seems like a
reasonable approach (smiles)
Q: You thought there was no
risk? Witness: Terraform Labs
said that, relatively
Q: Which is
riskier, UST or IBM stock?
Witness: Clearly, UST. [Light
laughter in the courtroom] Q:
Let's look at DX 4, a white
paper from the Terra website.
Witness: It's from before my
investment. I don't recall
this one, I apologize. Terra's
lawyer: No need.
Q: Let's look at
DX 352. A Delphi Digital
report about Terra - did you
review it? Witness: I've never
seen this. Definitively, this
time. Q: You followed the WSJ?
Witness: In my news
feed. Q: DX 46. WSJ on
crypto. SEC lawyer: Hearsay,
lack of foundation.
Judge:
Received for impact on the
witness. Q: It quotes a law
professor that TerraUSD "is
susceptible to a death spiral"
- how do you understand that?
Witness: Collapse. A long slow
death. Q: Is it fair to say--
SEC lawyer: Objection.
Foundation.
Judge: With
the reference to "death
spiral" I'm reminded we're
near the end of the day. I'd
like to finish with this
witness. How much more do you
have? Terra's lawyer: 10
minutes or so... Do you agree
with -- SEC lawyer: Objection!
He hasn't said he read that.
Judge: You
can only ask what he
understood then. Terra's
lawyer: Did you understand
TerraUST could fall into a
death spiral? Witness: Only if
their representations were not
true. Terra's lawyer: You
understood UST was a new
technology? Witness: A new
blockchain.
Terra's lawyer:
Nothing further. Judge Rakoff:
Re-direct. SEC's lawyer: Why
are you here? Witness: If
people do wrong they should be
punished. Do Kwon said it was
a stable coin.
Jury
leaves. Judge Rakoff: I would
never have adjourned the trial
until now if I hadn't thought
Mr. Kwon was doing everything
to be extradited here.
Defense: It's convoluted over
there. He's from South Korea
and has family here. He wanted
to participate here
Judge
Rakoff: I'm sure Montenegro is
a fine county, I've seen the
James Bond movie - some
dubious dealings, not
attributable to the court
(smile) Defense: He'd like to
participate in this trial. SEC
lawyer: Mr. Kwon's a
defendant. We feel strongly--
Judge
Rakoff: Whenever I hear a
lawyer says "I feel strongly"
I am tempted to rule against
him (smile) SEC: The jury will
think we didn't want to call
him. Judge Rakoff: If he were,
God forbid, in the hospital
abroad you couldn't call him.
You have a deposition
SEC lawyer: No,
it was an investigative
interview, he was in
Singapore. We could have
sought a consciousness of
guilt - he was fleeing to
Dubai with a Costa Rican
passport Judge Rakoff: That
was your decision.
SEC's lawyer:
It's like the Collector's
Coffee case [which Inner City
Press also covered]
Judge
Rakoff: I've had over 300 jury
trials. If you say, Do no draw
any adverse inference, it just
invites speculation. Let's
move on
More on Substack
here
The case is
Securities and Exchange
Commission v. Terraform Labs
Pte Ltd. et al., 23-cv-1346
(Rakoff)
***
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