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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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