John Reed Stark on “Five Key Fintech Takeaways from the Terraform-SEC Litigation”

Want some insight into the kind of high-speed civil litigation that arises in the complicated cyber/cryptocurrency finance world?  If so, today’s guest post by Duke Law grad and senior lecturing fellow John Reed Stark is definitely for you.  He opines on a current piece of very unusual  “fintech litigation involving a company called Terraform Labs. 

Lawfire® has long been interested in all things cyber (see e.g., here) to include cryptocurrency (see e.g., here).  Since Terraform’s description of its activities includes “building a decentralized price-stable cryptocurrency that will gain usage as a means of payment at massive scale through an alliance of large commerce partners across the globe,” I wanted to make sure you were aware of this important and uncommon litigation.  It was discussed at a recent session of Intro to Cyber Law and Policy, a terrific Duke Law course organized and co-taught by my colleagues Shane Stansbury and David Hoffman, along with a coterie of other professors including Professor Stark. (I taught the cyberwar section).

If you are new to the case, you may want to review this Yahoo News article which briefly discuses a lawsuit filed in October by Terraform and its co-founder Do Kwon to contest subpoenas issued by the U.S. Securities and Exchange Commission’s (SEC).  According to the report, “the company’s lawsuit not only disputes the subpoena and requested testimony from Kwon, a South Korea citizen and resident, but it also claims the SEC violated its own rules and hired an outside private process service company to deliver the subpoena at a crowded conference as a means to “publicly intimidate and embarrass.'” 

Unsurprisingly, the SEC has a rather different perspective, so take a look at their release about the case found here.  Below is part of it:

According to the SEC’s filing in U.S. District Court for the Southern District of New York, the SEC is investigating whether Terraform Labs, Kwon or others violated the federal securities laws by, among other things, not registering the offer or sale of securities, selling security-based- swaps outside of a national security exchange, acting as an unregistered broker or dealer, or engaging in securities transactions by an unregistered investment company. The filing states that, based on its ongoing investigation, the SEC has reason to believe that Terraform Labs and Kwon participated in the creation, promotion, and offer to sell mAssets and MIR tokens to U.S. investors. As stated in the filing, SEC staff served both Terraform Labs and Kwon with investigative subpoenas requiring the production of certain documents and compelling Kwon’s testimony. According to the filing, however, despite numerous attempts to negotiate with counsel, Terraform Labs and Kwon have refused to produce any documents and Kwon has failed to comply with the testimonial obligations.

The suit raises complicated issues of administrative law, securities law, justiciability, and more.  Professor Stark gives you his unvarnished views below, but also includes links to source documents so you can do your own evaluation.  Enjoy this dive into real-world, high-stakes fintech litigation!

Five Key Fintech Takeaways from the Terraform-SEC Litigation

By John Reed Stark

This month offers not one, but two, perhaps once-in-a-lifetime fascinating fintech litigation oddities. Both involve Terraform Labs, a Singapore-based cryptocurrency firm offering synthetic stocks on its blockchain, and its founder and CEO, Do Kwon.

First, on October 22, 2021, Terraform Labs and Kwon, filed a civil action against the U.S. Securities and Exchange Commission (SEC). Second, on November 12, 2021, the SEC filed the albino alligator of securities litigation – an SEC subpoena enforcement action seeking a court order directing Terraform and Kwon to comply with SEC subpoenas for testimony and documents.

This article discusses five key takeaways from the entire SEC-Terraform ordeal, highlighting some of the colorful and heretofore unknown, behind-the-scenes communication and timeline elements in the related court filings to date.

Some Background

While in New York attending a DeFi conference on September 20, 2021, the SEC served Kwon with subpoenas for testimony and documents relating to Terraform. Kwon disputed the legitimacy of the subpoenas, refused to comply, and together with Terraform, filed a civil action against the SEC on October 22, 2021, in the Southern District of New York (SDNY), arguing that the SEC violated his Constitutional due process rights and the SEC’s own Rules of Practice (the “Terraform Complaint”).[i]

The SEC has now begun to fight back against Terraform’s surprising litigation and lack of cooperation by filing a fiery and robust SEC subpoena enforcement action.[ii]  

Takeaway #1: Terraform and Kwon Are Not Cooperating with the SEC Investigation.

In the Declaration of SEC enforcement staffer Roger Landsman, which accompanies the SEC subpoena enforcement filing, Landsman, painstakingly details the how, what, why and when of the SEC investigation of Terraform and Kwon (“Landsman Declaration”).[iii] 

The Landsman Declaration focuses on the many communications between the SEC staff and Terraform’s counsel, where Terraform’s counsel: evidenced its lack of cooperation; made unreasonable demands; and generally engaged in a campaign of aggressive evasion of SEC lawful and routine fact gathering.

For instance, in a November 4th email from Terraform’s counsel to the SEC enforcement staff, Terraform and Kwon refuse to comply with the SEC subpoenas, stating defiantly that the SEC subpoenas were “not validly issued.”[iv] In addition, defense counsel to Terraform and Kwon persistently asks the SEC staff: 1) its intentions related to Terraform’s status in the investigation and relating to the Mirror Protocol; and 2) Whether the SEC is seeking a specific goal with respect to the operation of the Mirror Protocol (“so that Terraform can evaluate whether it might be able to assist the Commission in a cost-efficient and satisfactory resolution of the matter”).[v] 

Based on Terraform and Kwon’s filings and emails, Terraform and Kwon seem to be under the mistaken impression that merely because they filed a civil action against the SEC, and merely because the SEC has not responded to their questions, the SEC must suspend its investigation and pause all of its subpoenas. 

But Terraform’s civil action against the SEC does not somehow stay the execution of the SEC’s subpoenas. Moreover, although there is certainly no harm in asking, until the SEC concludes its investigation, the SEC enforcement staff rarely ever: 

    • Reveal their intentions (other than those relating to what the SEC intends to investigate, as set forth in the SEC’s Formal Order of Investigation); 
    • Discuss the status of its investigation (SEC investigations are forever evolving); or 
    • Provide compliance advice and guidance going forward for any company or individual. 

Since SEC enforcement staff’s first email to Terraform’s counsel, which asked Terraform to “voluntarily meet via videoconference to discuss the Mirror Protocol and how it works,”[vi] the SEC has repeatedly expressed their frustration with Terraform’s elusive responses and overall lack of cooperation, documenting a powerful case for subpoena enforcement.[vii]

Takeaway #2: The SEC is Investigating Terraform with a Broad Brush, Suspecting a Litany of Securities Violations.

Per the Landsman Declaration, the Mirror Protocol is a series of computer codes written on a blockchain through which users create digital assets, called Mirrored Assets, or “mAssets.” The mAssets “mirror” equity or other types of securities traded in the United States, including those traded on U.S. national securities exchanges, such as shares of Apple, Inc. or Tesla, Inc.,[viii] in that they are designed so that their value rises and falls with the value of those securities.[ix]

According to the Landsman Declaration, the SEC’s has concerns that Terraform, the mAssets and the MIR tokens are not registered with the SEC in any capacity.[x] Thus, the SEC subpoenas seek documents necessary for the SEC’s investigation relating to the Mirror Protocol, including, among other things, documents concerning investors who purchased MIR tokens from Terraform; Terraform’s presentations to investors in MIR tokens; Terraform’s marketing and promotion of the Mirror Protocol, MIR tokens, and mAssets, including Terraform’s and Kwon’s communications with investors; Terraform’s ability to control, effect or change the Mirror Protocol; Terraform’s agreements with third parties regarding the sale or transfer of mAssets and MIR tokens, the corporate structure of Terraform, whether Terraform owns any MIR tokens, and whether Terraform has raised capital in connection with the Mirror Protocol.[xi]

In addition, the SEC issued a subpoena for Kwon’s sworn testimony regarding, among other topics, Terraform’s marketing and promotion of the Mirror Protocol, MIR tokens, and mAssets, including Terraform’s and Kwon’s communications with investors; Terraform’s presentations to investors in MIR tokens; Terraform’s relationship with a U.S.-based digital asset trading platform, its contacts with third parties regarding the sale of MIR tokens, the corporate structure of Terraform, whether Terraform owns any MIR tokens, and whether Terraform has raised capital in connection with the Mirror Protocol.[xii] 

The Landsman Declaration also references new areas of inquiry developed since the SEC’s initial document requests to Terraform, hinting that the SEC’s investigation of Terraform and Kwon has begun to expand. 

Takeaway #3: Terraform and Kwon Will Lose Their Litigation with the SEC.

According to the SEC’s Memorandum in Support of its subpoena enforcement action, the SEC is conducting an investigation probing whether Terraform’s involvement with digital assets violated the registration and other related provisions of the federal securities laws.[xiii]

Per the SEC Support Memorandum, Terraform and Kwon have failed to meaningfully cooperate for months. After a lengthy negotiation regarding the Commission’s voluntary document requests during which Terraform indicated they would comply, Terraform apparently reversed course and refused to produce any documents. Kwon also agreed to an interview under a proffer agreement with the Commission, but then failed to answer multiple lines of relevant questioning.[xiv] For example, Kwon was unable to provide specific information or failed to answer several questions on a variety of topic areas, including Terraform’s relationship with a U.S.-based digital asset trading platform, its contacts with third parties regarding the sale of MIR tokens, the corporate structure of Terraform, whether Terraform owned any MIR tokens, and Terraform raising capital in connection with the Mirror Protocol.

Given Kwon’s failure to answer questions to the SEC’s satisfaction, the SEC then served investigative subpoenas seeking documents and testimony from Terraform and Kwon. Terraform and Kwon then refused to comply, repeatedly asserting that the subpoenas were not validly served, even though they were personally served upon Kwon in Manhattan and delivered electronically to Terraform and Kwon’s counsel. 

The Terraform Complaint argues that by serving Kwon, the SEC violated its own Rules of Practice, citing SEC Rule of Practice 150(b) which provides that whenever service is required to be made upon a person represented by counsel who had filed a notice of appearance, service shall be made upon counsel . . .”[xv]

Terraform and Kwon go as far as to argue that in order for Kwon to be properly served during the SEC’s investigation, “the SEC had to get a vote of the actual Securities and Exchange Commission”[xvi] – an extraordinarily burdensome and heretofore unprecedented legal requirement.   

Not surprisingly, the SEC Support Memorandum makes short shrift of Terraform’s arguments, first by reciting the low standard for obtaining subpoena authority, which merely requires that the: 1) Investigation is conducted for a legitimate purpose and that the subpoenas are relevant to the purpose; 2) Information sought is not already within the SEC’s possession; and 3) SEC has followed required administrative steps.

After clearly explaining how the SEC meets each of the above factors, the SEC then tackles head-on Terraform’s argument, noting three independent reasons that “through any lens” Terraform and Kwon’s effort to thwart proper SEC service lacks merit:

    1. Terraform and Kwon failed to file the notice of appearance that defense counsel contends triggered the obligation to serve only counsel;
    2. SEC investigations are not “proceedings” as defined in Rule 101 of the SEC’s Rules of Practice and notices of appearances are filed in “proceedings” before the Commission, not in investigations, which typically occur before proceedings;[xvii] and
    3. Rule 150(d) of the SEC’s Rule of Practice unequivocally states that serving investigative subpoenas pursuant may be made by handing a copy to the person required to be served, which is exactly what the SEC did.[xviii]

In short, taking testimony and collecting documents is perhaps the most fundamental process the SEC uses for conducting investigations, and personally serving witnesses with subpoenas is a routine aspect of that process. Hence, Terraform and Kwon’s attempt to challenge such bedrock principles of the SEC’s core mission are ill-fated to say the least. 

Takeaway #4: Terraform and Kwon’s Refusal to Comply with SEC Subpoenas was Unnecessary and Unwarranted.

For a witness who wants to oppose an SEC subpoena, filing a federal lawsuit to quash is not only unnecessary, but also remarkably uncommon. Why? Because SEC procedures offer a simpler, logical, practical and far less public manner for doing so. 

SEC subpoenas to witnesses or companies are not self-enforcing. Unlike grand jury subpoenas, for instance, the SEC cannot secure a U.S. Marshall to arrest a person and escort them to SEC headquarters. Thus, the SEC’s only remedy for a witnesses’ refusal to comply is with a subpoena enforcement action.[xix] 

But before the SEC will proceed with a subpoena enforcement action, the SEC must build a compelling record of noncompliance by a witness. During this time, effective SEC defense counsel can: limit testimonial inquiries and document requests; stifle overbroad SEC subpoenas that are redundant, unfairly burdensome, not relevant or otherwise unnecessary; glean the weight of SEC evidence and the direction of an SEC investigation; and provide a range of other legitimate means of defense — all before the public might not even become aware of the SEC’s investigation. Experienced SEC defense counsel can also delay appearances until practical, and then aggressively defend their clients during testimony.  

But Terraform and Kwon have opted out of artful compliance, optical cooperation and a more sophisticated SEC defense strategy of delay, debate and discuss. In stark contrast, Terraform and Kwon have inexplicably jettisoned the chance to legitimately restrict, hamper and avoid SEC scrutiny.[xx] This curious posture seems not just unjustifiable – but also reckless and imprudent. 

Takeaway #5: Terraform and Kwon Have Assumed an Incalculable Risk.

This SEC subpoena enforcement action contains a broad range of uncontested SEC allegations and factual findings never before known to the public. Normally, the SEC must keep confidential even the existence of an investigation unless and until the SEC files a related civil enforcement action. 

However, because Terraform and Kwon have filed the Terraform Complaint and refused to comply with the SEC’s subpoenas, the SEC now enjoys free reign to reveal in its subpoena enforcement action secret or confidential information gathered during its investigation. In other words, the Terraform complaint has afforded the SEC staff the extraordinary opportunity to broadcast their uncontested views to the world, commenting in any way they seem fit. 

This is why litigating with the SEC before the SEC files an enforcement action is so rare and why failing to comply with an SEC subpoena is so uncommon. Terraform and Kwon have now assumed the significant and indeterminable risks associated with giving the SEC carte blanche to state publicly what they are otherwise legally bound to keep confidential.

Looking Ahead

On April 19, 2010, I participated on a National Press Club panel with famed Judge Stanley Sporkin, who served as SEC Enforcement Director from 1974-1981. That morning, the SEC had just announced a blockbuster enforcement action against Goldman Sachs relating to the 2009 financial meltdown.

The late Judge Sporkin was shocked that Goldman had not settled the action, stating, “Never fight with your regulator . . . because if you lose, you can be out of business.” [xxi] Terraform’s counsel would benefit by heeding Judge Sporkin’s prescient admonition.

Granted, Terraform and Kwon believe that their operations somehow fall outside or beyond SEC jurisdiction. However, the SEC might disagree, and under any circumstance, the SEC not only has infinite resources and a dogged, respected and erudite Chair in Gary Gensler, their record with respect to cryptocurrency-related enforcement actions is also undefeated, with over 75 wins and no losses.[xxii] 

When the SEC files its motion to dismiss to Terraform Complaint,[xxiii] Terraform and Kwon will likely respond with a slew of objections, oppositions and other motions and letters in-between. Along the same lines, Terraform and Kwon must now file an opposition to the SEC subpoena enforcement action and then the SEC will file its reply.[xxiv] Hence, expect a long-drawn-out conflict ahead – with the millions (or even tens of millions) of dollars of legal fees incurred by Terraform and Kwon growing considerably.   

Even worse, no one can accurately forecast the collateral damage caused by an SEC subpoena enforcement action, which could: 

    • Damage the reputation, business and operations of Terraform and Kwon; 
    • Disrupt or even derail any relationships Terraform has with customers, shareholders, partners, vendors, suitors and any other collaborating or interested constituency; 
    • Curtail, restrict and disturb even the most basic of Terraform’s operations; 
    • Prompt a slew of other lawsuits from parties who were potentially aggrieved or blindsided by any of the SEC’s allegations; and 
    • Trigger other devastating unexpected consequences.  

In the end, after undoubtedly expending astonishing amounts of cash, time, effort and countless other critical resources litigating with the SEC, the result will amount to more than just another SEC fintech enforcement victory. In addition, the fallout from warfare with the SEC will likely leave Terraform poorer, weaker, demoralized and perhaps even seriously wounded.

My take is that Terraform and Kwon have poked the bear, and, for reasons that make little sense, seem committed to a bitter and protracted melee with the SEC. Now the SEC has begun to lean-in – the worst possible outcome for any company under SEC investigation.

SEC Compendium of Certain SEC/Terraform/Kwon Court Filings (In Chronological Order)

May 23, 2021, Email From SEC to Terraform “inviting” Terraform to voluntarily meet with the SEC staff via video teleconference “to discuss the Mirror Protocol and how it works.”

July 22, 2021, Email from SEC to Terraform with Voluntary Request for Documents

August 17, 2021, Response Letter in connection with SEC July 22nd Request for Documents

September 17, 2021, SEC Subpoena for Testimony and Documents Sent to Terraform

October 1, 2021, Email from Terraform counsel to SEC noting that the service might be invalid; suggesting an engagement in “productive discussions;” requesting that the SEC explain their position; and requesting that the SEC suspend all return dates on subpoenas so “we can focus on whether the matter can be resolved.”

October 19, 2021, email from Terraform counsel to SEC seeking discussion of Terraform’s prior “settlement proposal.”

October 22, 2021, Terraform Complaint Against SEC for unlawful and unconstitutional service of subpoenas

November 1, 2021, Email from SEC to Terraform counsel seeking compliance with the SEC subpoenas and a responding November 4, 2021, Email from Terraform counsel to SEC refusing to do so.

November 12, 2021, SEC Litigation Release Announcing SEC Subpoena Enforcement Action Against Terraform Labs and Its CEO (Litigation Release No. 25262 / November 12, 2021

November 12, 2021, SEC Litigation Release Announcing SEC Subpoena Enforcement Action Against Terraform Labs and Its CEO (Litigation Release No. 25262 / November 12, 2021, Securities and Exchange Commission v. Terraform Labs PTE, Ltd. and Do Kwon, No. 21-mc-810 (S.D.N.Y filed November 12, 2021)

November 12, 2021, SEC Petition to Enforce Administrative Subpoena Against Terraform and its Founder, Do Kwon

November 12, 2021, SEC U.S. Memorandum In Support Of Application For An Order To Show Cause And For An Order Requiring Compliance With Subpoenas

November 12, 2021, Declaration Of Roger J. Landsman In Support Of U.S. Securities And Exchange Commission’s Application For An Order To Show Cause And For An Order Requiring Compliance With Subpoenas

November 15, 2021, Letter-motion filed by Respondents Terraform Labs PTE, Ltd. and Do Kwon, Requesting that the SEC’s Order to show Cause and Terraform and Do Kwon’s lawsuit Against the SEC Be consolidated before the Same District Judge Presiding Over the Terraform/Do Kwon civil Action (Terraform Labs PTE, alv. SEC, 21-cv-8701

November 16, 2021, Notice of Case Reassignment to Judge J. Paul Oetken, Who Presides Over Terraform/Do Kwon Civil Action Against the SEC. (Noticed In Docket, No Written Order)

November 17, 2021, SEC Response to Letter-Motion Opposition to Consolidate Subpoena Enforcement Action and Terra Form/Kwon Civil Action, Opposing Motion to consolidate

November 18, 2021, Terraform and Do Kwon Letter Responding to the SEC’s letter dated November 17, 2021.

December 3, 2021, Transcript of Remote Teleconference before Honorable J. Paul Oetken.



[ii] Once Terraform and Kwon file their response to the SEC subpoena enforcement action (due December 17, 2021), the SEC will also likely file a blistering reply (due December 24, 2021).





[vii] Along the same lines, according to one email, the SEC appears to have been similarly unimpressed with some sort of “settlement proposal” submitted by Terraform’s defense counsel on October 22, 2021.

[viii] The mAssets corresponding to those equities have been named as “mAAPL” or “mTSLA.”

[ix] Users access the Mirror Protocol through a variety of means, including through Terra’s website and web application.

[x] For example,  Terraform has not registered any offering of securities pursuant to the Securities Act, nor has it registered the mAssets or MIR tokens as a class of securities under the Exchange Act. Terraform has also not registered with the SEC as a broker or dealer under Section 15(a) of the Exchange Act, or as an investment company under Section 7(a) of the Investment Company Act.



[xiii] The matter is captioned In the Matter of Mirror Protocol.

[xiv] According to the Landsman Declaration, after several rounds of negotiations, the SEC entered into a proffer agreement with Do Kwon. The SEC staff then interviewed Kwon by videoconference for approximately four and a half hours on July 8, 2021.

[xv] Unless service upon the person is ordered by the Commission or the hearing officer


[xvii] The SEC also argues that in any event, although Terraform and Kwon fault the Commission for not serving through counsel, the Commission staff delivered the subpoenas by email to counsel for Terraform and Kwon on the same day they were served. The SEC notes that the Terraform and Kwon are particularly misguided, because even had they filed the notice of appearance that they contend triggered an obligation to serve only counsel under Rule 150(b) (and they did not), Rule 150(b) then requires the Commission to serve counsel in accordance with Rule 150(c), which explicitly permits electronic service – the precise way that the SEC staff delivered the subpoenas to Terraform and Kwon’s counsel and

[xviii] As an aside, the SEC explains that there is nothing sinister, erroneous or even inappropriate about the SEC’s use of a process server. During the course of its investigations, both formal and informal, SEC enforcement staff regularly employ process servers as a useful and effective means to ensure proper notice to witnesses.

[xix] As an aside, unlike the U.S. Department of Justice, the SEC has no classifications for persons it investigates. i.e. at the SEC there is no such designation as a target or a subject — only witnesses, who all have the same rights under SEC practices and procedures. Hence, although receiving an SEC subpoena is always troublesome, unsettling, disruptive and perhaps even terrifying, there exist no negative inferences, ominous procedural ramifications or other significant legal stigma associated with receiving an SEC subpoena.

[xx] In addition, before any SEC action is filed, Terraform would typically have ample opportunity to respond to any SEC allegations with a non-public and confidential written Wells submission and Wells meeting. Seasoned defense counsel will typically use the Wells process not only as an opportunity to convince the staff not to submit, or limit their enforcement recommendation to the Commission, but also as a means to temper the tone of an SEC enforcement action and influence pleadings, press releases, etc. But since Terraform and Kwon have filed the civil action and refused to comply with the SEC subpoenas, this opportunity is also somewhat last, because the facts presented in the various SEC filings can never be rescinded.




[xxiv] Terraform and Kwon must file their response to the SEC subpoena enforcement action by December 17, 2021, and the SEC has until December 24, 2021 to file their reply.

About the author

John Reed Stark is president of John Reed Stark Consulting LLC, a data breach response and digital compliance firm. Formerly, Mr. Stark served for almost 20 years in the Enforcement Division of the U.S. Securities and Exchange Commission, the last 11 of which as Chief of its Office of Internet Enforcement. He currently teaches a cyber-law course as a Senior Lecturing Fellow at Duke University Law School. Mr. Stark also worked for 15 years as an Adjunct Professor of Law at the Georgetown University Law Center, where he taught several courses on the juxtaposition of law, technology and crime, and for five years as managing director of global data breach response firm, Stroz Friedberg, including three years heading its Washington, D.C. office. Mr. Stark is the author ofThe Cybersecurity Due Diligence Handbook.”

The views expressed by guest authors do not necessarily reflect the views of the Center on Law, Ethics and National Security, or Duke University.  Lawfire® posts are not intended to be and should not be taken as legal advice.

Remember what we like to say on Lawfire®: gather the facts, examine the law, evaluate the arguments – and then decide for yourself!

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