Terraform Says Bankruptcy Case Vital in Appealing SEC’s Fraud Lawsuit

• Terraforms said bankruptcy proceedings will help appeal the SEC’s lawsuit.
• Terraforms filed for bankruptcy last week and will have its first day of hearing today.
• The company can avoid costs by relying on protections offered under the Chapter 11 proceedings.

Ahead of the commencement of its Chapter 11 proceedings, troubled cryptocurrency firm Terraform Labs revealed that its decision to file for bankruptcy will help in its efforts to appeal the litigation that the US Securities and Exchange Commission (SEC) is pursuing against the company. 

In the January 30 filing at a Delaware Bankruptcy Court, Terraform Labs CEO Chris Amani argued that the bankruptcy is integral to successfully appealing it’s lawsuit with the SEC. The CEO wrote:

“[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 community), provide an orderly process for resolving competing claims against it, and pursue an appeal of the SEC Enforcement Action.”

Before Terraform Labs could file an appeal against the SEC, it would normally have to provide a “supersedeas bond” equal to 110% of the whole judgment. However, Chapter 11 bankruptcy protections may allow the business to file an appeal without having to deposit the bail.

On January 21, Terraforms filed for bankruptcy in the United States, estimating its assets and liabilities to be between $100 million and $500 million. The troubled firm created the now-defunct stablecoin TerraClassicUSD (USTC) and sister token LUNA, the collapse of which precipitated the crypto winter in 2022. 

The SEC alleged that the company and its founder, Do Kwon , ran a “multibillion-dollar crypto asset securities fraud” with USTC and LUNA tokens. However, the company argued that the two tokens do not qualify as securities and are outside the jurisdiction of the SEC. 

According to Terraform’s CEO, a successful appeal of the SEC’s claims would reduce the company’s liabilities. In addition, the CEO said it might also lead to favorable financial results for the debtor, creditors, and the community. 

The first-day hearing in the Terraform Labs Chapter 11 proceedings is scheduled to take place today. Two weeks ago, the SEC granted Kwon’s legal team’s request to push back the founder’s fraud trial to March 25.

The troubled founder, who disappeared after Terraform’s implosion, is facing legal action in the United States and his home country of South Korea. The two countries are seeking to extradite him from Montenegro, where he is presently imprisoned for falsifying travel documents in a bid to escape from the country.