Terraform Labs Plays Hardball In SEC Case, Requests Subpoena For FTX Documents

Terraform Labs (TFL), the developer of the failed Terra blockchain, has filed a court motion requesting permission to subpoena bankrupt cryptocurrency exchange FTX for relevant documents that it can use to defend itself against an ongoing case brought by the U.S. Securities and Exchange Commission (SEC). 

In a court filing on July 19, Terraform Labs argued that the requested documents are necessary for its defense and that they are in the possession, custody, and control of the Debtors, including FTX Trading Ltd. and West Realm Shires Services Inc.

Terraform Labs Requests Information On FTX Wallets

TFL seeks limited document discovery on unrelated claims that do not affect Debtors. The documents in question are records about wallets, accounts, and assets used to transact on FTX International and US exchanges, as well as sales and offers of large volumes of cryptocurrencies developed by TFL. 

Per the court filing, Terraform Labs claims that this evidence is in the possession, custody, and control of FTX Trading Ltd. and FTX US, which operate as debtors-in-possession under sections of the Bankruptcy Code.

Additionally, TFL seeks information from the centralized FTX International and US Exchanges about wallets used by Jump Trading to trade UST or LUNA on these exchanges from May 1 to May 31, 2021, and May 1 to May 31, 2022. 

TFL also requests information about wallets and trading accounts used to deposit, transfer, or trade assets used by short sellers from March 1 to May 31, 2022, as well as other wallets and trading accounts that may have been used by these or other short sellers. 

TFL requires details about their balances/holdings and identities of owners/controllers from January 1, 2018, to the present.

The case brought by the SEC alleges that TFL falsely represented the ability of the algorithmic “mint/burn” mechanism utilized by the UST stablecoin, one of the cryptocurrencies developed by Terraform Labs, to withstand market forces in the event of a depeg, which led to the depeg of UST from its price peg in May 2021 and May 2022.

TFL CEO Provides Evidence Of Short Seller Manipulation 

Moreover, Chris Amani, the new CEO of Terraform Labs, filed a supporting motion in the ongoing case with the SEC, providing evidence that short sellers used FTX-related accounts to submit massive sell orders at the beginning of the attack on UST. 

Amani argued that publicly available order book information shows that these sellers transferred the UST sales proceeds to FTX exchange deposit wallets. This evidence is significant because it supports TFL’s defense against the SEC’s allegations, suggesting that short sellers used FTX-related accounts to initiate the attack on UST.

TFL argues it can only obtain the documents and information it seeks via subpoenas on Debtors. The court filing states that TFL will be “substantially and irreparably harmed without such discovery.” 

The trial is expected after November 30, 2023, and the New York court, with the pending SEC Action, will need time to issue the subpoenas to Debtors. 

Featured image from Unsplash, chart from TradingView.com