Court of Appeals Affirms Order Against Terraform and Kwon in SEC Subpoena Enforcement Action

Litigation Release No. 25415 / June 9, 2022

Securities and Exchange Commission v. Terraform Labs Pte Ltd. and Do Kwon, Case No. 22-368-cv (2d Cir. 2022)

On June 8, 2022, the United States Court of Appeals for the Second Circuit affirmed a district court order requiring compliance with investigative subpoenas served by the Securities and Exchange Commission on Terraform Labs Pte Ltd and Do Kwon. The subpoenas for documents from Terraform and Kwon, as well as testimony from Kwon, were served as part of an SEC investigation into whether Kwon and Terraform violated federal securities laws in their participation in the creation, promotion, and offer to sell various digital assets related to the "Mirror Protocol," a blockchain technology.

According to the appellate court's summary order, Terraform and Kwon argued on appeal that the SEC violated its Rules of Practice when it served the subpoenas by handing copies to Kwon, Terraform's chief executive officer, while he was present in New York, and that the district court lacked personal jurisdiction because Kwon and Terraform had insufficient contacts with the United States. In rejecting those arguments, the appellate court reasoned in relevant part that Terraform's and Kwon's "reading of the Rules is contrary to the text and would produce absurd results by allowing a party to insist on service through counsel, but allow the party to block said service by not authorizing their counsel to receive any filings." The appellate court further rejected Terraform's and Kwon's jurisdictional arguments, noting the district court's jurisdiction over Terraform and Kwon arose from their "purposeful and extensive U.S. contacts," such as promoting to U.S. investors, employing U.S.-based personnel, and contracting with U.S.-based entities.

The SEC was represented on appeal by Eric A. Reicher and Samuel M. Forstein, and in the district court action by James Connor. The SEC's investigation is being conducted by Roger Landsman, Kathleen Hitchins, and Elisabeth Goot. The SEC is continuing its fact-finding investigation and, to date, has not concluded that any individual or entity has violated the federal securities laws.