Class action lawsuits against Terra are here. Can they succeed?

A flurry of class action lawsuits has renewed UST and LUNA holders’ appetite for justice, but it’s too early to celebrate.

Big yellowish Moon hanging above a calm seashore

Bragar Eagel & Squire, a stockholder rights law firm, filed a new class action lawsuit against Terraform Labs, its associates, and Do Kwon himself. The firm invited affected holders of Terra tokens, which include more than just UST and LUNA, to join the case. Long-term stockholders and informants are also encouraged to come forward. The call is valid until August 19.

The lawsuit alleges that Terra “intended to and did deceive retail investors and thereby caused them to purchase Terra Tokens at artificially inflated prices.” It also states that Do Kwon’s company misled the investors as well as “made untrue statements.” In other words, lied.

Bragar Eagel & Squire’s lawsuit is not the only one around. Scott+Scott Attorneys at Law and The Rosen Law Firm both announced they were taking similar steps against the same defendants. All three lawsuits have been filed to the US District Court for the Northern District of California.

Bigger war in the background

But while the flurry of class action lawsuits gives the dispirited Terra community a new glimmer of hope, it’s not guaranteed that any of them will succeed, partly because of the conundrum around the legal status of crypto companies in the United States.

Specifically, all three lawsuits claim that Terra had infringed the Securities Act, among other violations, thus presuming that Terra’s tokens were in fact securities. A presumption that happens to be quite controversial.

As the US administration works to bring President Biden’s March executive order, which called for a whole-of-government effort to create a federal legal framework for cryptoassets, to fruition, the wars over which coins should be treated as securities, and which as commodities, are only just getting started.

The Securities and Exchange Commission (SEC) has on numerous occasions stressed that it considers all cryptocurrencies except Bitcoin and Ethereum as securities, a position that’s been challenged by the Commodity Futures Trading Commission (CFTC). As Ethereum’s Merge draws near, even Ether’s commodity status is being questioned, particularly by Bitcoin maximalists.

The available evidence suggests that both UST and LUNA will end up getting qualified as securities, but at present, there’s no solid legal framework supporting that assessment.

Confusing jurisdictions

Apart from the background wars between the SEC and the CFTC, there remains a question of jurisdiction. Back in June, a US court rejected Terra’s argument that Do Kwon and Terraform Labs had insufficient contacts with the United States to warrant personal jurisdiction, but the company is based in Seoul and headquartered in Singapore, with angry and disheartened UST and LUNA holders scattered all over the world.

Currently, investigations are underway in South Korea and the US. The two administrations agreed to share the data they collect. But if more countries and entities decide to take legal action against Do Kwon and his company, things will become more likely to end up in some sort of deadlock.

Are class action lawsuits effective?

Even assuming that Do Kwon will find himself in an American court alongside his associates, it’s difficult to predict the outcome. Not every class action lawsuit results in a settlement.

“The number of cases settled in 2020 is the lowest recorded number of settled cases in the most recent 10-year period,” according to a study on federal securities class action litigation by NERA Economic Consulting. In 2020, 247 cases were resolved in favor of the defendant and only 73 ended up being settled, NERA found.

Still, the fact that Terra’s collapse has attracted three separate lawsuits indicates that the firms consider the case a realistic win. At little to no cost or risk to participants and with a prospect of at least partial compensation, the three plaintiffs are looking to channel the fury of the crypto community, which now has more recent insolvencies to worry about, back at Terra. Time will tell if those who answer the call hope to reclaim lost funds or simply take revenge, which, as the saying goes, is best served cold.