Divide in the Southern District Over When Cryptocurrency is a Security

On July 31, 2023, and only a few weeks after the Ripple decision, another judge in the U.S. District Court for the Southern District of New York held that the case against Terraform Labs (Terraform) and its CEO may proceed because the Security and Exchange Commission (SEC) adequately pled that Terraform’s crypto assets (a stablecoin and the Luna reserve asset cryptocurrency) may qualify as securities.

 Howey Test and Ripple

The Securities Act regulates the offer and sale of securities and grants broad enforcement authority to the SEC. Under Section 5 of the Securities Act, it is unlawful to sell, offer to buy or purchase a security, including investment contracts, without a registration statement.

In 1947, the U.S. Supreme Court articulated a three part test for determining whether or not a transaction constitutes an investment contract. In SEC v. W.J. Howey Co., the Supreme Court held that an investment contract is “a contract, transaction, or scheme whereby a person (1) invests his money (2) in a common enterprise and (3) is led to expect profits solely from the efforts of the promoter or a third party.”

In recent years, judges have used the Howey Test to find that specific crypto assets are securities or investment contracts. In these rulings, developer statements tying the value of digital assets or profits depending on the “efforts of others” or pooling funds was sufficient to find participation in a “common enterprise” satisfying the Howey Test.

The SEC has brought more than 100 enforcement actions involving crypto assets by asserting that tokens constitute securities.

In the Ripple decision published earlier in July, Judge Torres walked through the Howey Test and ultimately determined that the decision depended on the third prong of the Howey Test, investor knowledge and expectation.  In holding the crypto tokens may constitute a security in the context of sales to institutional buyers but not in programmatic sales, Judge Torres found that the sophisticated institutional buyers have experience, expertise, and understand the speculative nature of their investments and had an expectation of profits from their investments where the programmatic sales to retail investors did not involve such considerations.


Terraform is a Singapore-based company that develops, markets, and sells crypto assets including the Terra/UST and LUNA tokens and is known for developing the Terraform blockchain.  In 2021, the value of the UST became unstable and ultimately crashed resulting in the loss of over $40 billion to investors leading the SEC to bring an enforcement action.

In denying Terraform’s motion to dismiss, the court held that some of Terraform’s crypto assets, such as stablecoins, may not qualify as securities but the promotion of its digital assets did constitute securities.  In the ruling, the court expressly and directly rejected the application of the Howey Test analysis in Ripple, particularly the differentiation of purchasers. Accordingly the court stated that “Howey makes no such distinction between purchasers” and if the SEC’s allegations are true, “the defendants’ embarked on a public campaign to encourage both retail and institutional investors to buy their crypto-assets by touting the profitability of the crypto-assets and the managerial and technical skills that would allow the defendants to maximize returns on the investors’ coins.”

Terraform advertised and stated that purchases of all its crypto assets would directly feed into the Terraform blockchain and generate profits for all asset holders.  These statements presumably reached purchasers of all kinds and made investors belief that their contributions would be used to generate profits.


The SEC will almost certainly appeal the Ripple decision to solidify its position on crypto assets. The SEC will likely leverage the Terraform opinion to assert in other enforcement actions, that crypto assets are securities.

It is important to note that the Ripple and Terraform decisions were at different procedural stages in litigation.  The Ripple decision was at summary judgment where a well-developed factual record was available while Terraform was on a motion to dismiss.  It still remains to be seen if the SEC can prove its allegations and survive summary judgment.

Pennsylvania Innocence Project Recognizes Leigh Skipper for His Commitment to Pursuing Justice

The Pennsylvania Innocence Project presented the 2023 Maureen Rowley Award to Duane Morris partner Leigh Skipper. Leigh is the former Chief Federal Defender for the Eastern District of Pennsylvania. He succeeded Maureen Rowley in that role in 2009 and led one of the largest and most respected federal defender offices in the country until 2022. After graduating from law school, Leigh spent his career working in criminal defense at the Federal Defender and the Defender Association of Philadelphia. Leigh has served as the president of the Barrister’s Association of Philadelphia and the National Association of Federal Defenders and as the chairman of the Philadelphia Bar Association’s Judicial Selection and Retention Committee. He is a fellow of the American College of Trial Lawyers and chairs the Public Defender Committee.

Read more about Leigh on the Pennsylvania Innocence website.

Duane Morris Partner Michael Lipman Quoted on “Fat Leonard” Extradition

Duane Morris partner Michael Lipman was quoted on ABC10 News in San Diego in reference to the “Fat Leonard” Francis extradition case. Francis, who pleaded guilty to bribing U.S. Navy officers, removed his GPS monitor and fled to Venezuela. From the article:

Lipman has both prosecuted and defended extradition cases during his career. He says several factors can come into play in determining how long Francis could remain in Venezuelan custody.

That includes the terms of the extradition treaty, Venezuelan law, and whether Francis has the right under Venezuelan law to challenge extradition. However, Lipman says sometimes countries can negotiate outside of the treaty.

“You have no idea what’s going on between the United States and Venezuela and what debits and credits can be called on regardless of what the relationships are with the country.”

Lipman also said it is even possible Venezuela decides to avoid any of that trouble by simply returning Francis.

To read the full text of the article and view the video, please visit the ABC10 News website.

Fraud-On-The-FDA Theory Of Liability Reawakened by DOJ Filing

On June 3, the U.S. Department of Justice Civil Division’s Washington, D.C., office filed a statement of interest in a relator’s action, arguing that “[c]onduct giving rise to a regulatory violation can also give rise to” False Claims Act liability.

The case is U.S. ex rel. Patricia Crocano v. Trividia Health Inc., before the U.S. District Court for the Southern District of Florida.

Specifically, the DOJ requested “that the ruling not foreclose the possibility that, under certain circumstances,” conduct that violates the Federal Food, Drug and Cosmetic Act or U.S. Food and Drug Administration regulations “could be material to the government’s payment decisions and provide a basis for FCA liability assuming all necessary FCA elements are demonstrated,”[3] colloquially known as “fraud on the FDA.”

This filing makes clear the DOJ’s decision to reawaken a theory of liability thought to be dead.

To read the full text of this article by Duane Morris attorneys Eric Breslin, Frederick R. Ball and Brittany Pagnotta, originally published in Law360, please visit the firm website.

Supreme Court Declines to Allow Miranda Violations as a Basis For a 42 U.S.C. § 1983 Claim

By Mario J. Cacciola

On June 23, 2022, the Supreme Court of the United State held that a violation of the Miranda rules does not provide a basis for a claim under 42 U.S.C. § 1983.  Writing for the majority in Vega v. Tekoh, 597 U.S.  (2022), Justice Alito stated, “The question we must decide is whether a violation of the Miranda rules provides a basis for a claim under § 1983.  We hold that it does not.”  In reaching its decision, the Court rejected the Ninth Circuit Court of Appeals finding that Miranda constitutes a violation of Fifth Amendment protections, and described Miranda as “set of prophylactic rules” that are “constitutionally based” rather than a de facto violation of the Fifth Amendment.  As a result of the Court’s decision, the relief individuals may seek when facing a violation of Miranda is limited to seeking to exclude any wrongfully obtained statements from use at trial. Continue reading “Supreme Court Declines to Allow Miranda Violations as a Basis For a 42 U.S.C. § 1983 Claim”

Key Questions for New York and New Jersey Businesses Following the U.S. Supreme Court’s Gun Decision

On June 23, 2022, the Supreme Court of the United States recognized a constitutional right for citizens to carry a firearm outside the home for self-defense. The opinion invalidates the licensing regimes for carry permits in California, Hawaii, Maryland, Massachusetts, New Jersey, New York and the District of Columbia. Although New York and New Jersey each allow for licenses to carry, they were previously limited to those who could show some extraordinary need, and therefore not available to the average citizen. In New York Rifle & Pistol Assn. v. Bruen, the Supreme Court held that such restrictions are unconstitutional and that law-abiding citizens have a right to carry a gun for self-defense purposes.

This means that, for the first time since the early and mid-20th century, respectively, residents of New York and New Jersey will be permitted to carry firearms in public.

To read the full text of this Duane Morris Alert, please visit the firm website.

Fraud-on-the-FDA Theory of False Claims Act Liability Clarified by DOJ

On June 3, 2022, the Civil Division of the Department of Justice filed a statement of interest in a relator’s action in the Southern District of Florida, arguing that “[c]onduct giving rise to a regulatory violations can also give rise to [False Claims Act] liability.” Specifically, requesting “that the ruling not foreclose the possibility that, under certain circumstances, conduct giving rise to violations of the [Federal Food, Drug and Cosmetic Act] or FDA regulations could be material to the government’s payment decisions and provide a basis for FCA liability assuming all necessary FCA elements are demonstrated,” also known as “fraud on the FDA.”

To read the full text of this Alert, please visit the firm website.

United States Supreme Court Recognizes a Constitutional Right to Carry Firearms for Self-Defense

On June 23, 2022, the Supreme Court of the United States struck down New York’s restrictive concealed carry licensing regime as unconstitutional under the Second Amendment, invalidating licensing regimes in an additional six jurisdictions. In so doing, the Court rejected the long-standing practice of balancing the text and history of the Second Amendment with governmental interest, known as “means-end” scrutiny.

To read the full text of this Duane Morris Alert, please visit the firm website.

Longtime Federal Public Defender Leigh Skipper to Join Duane Morris at End of June

After leading the Federal Community Defender Office for the Eastern District of Pennsylvania for 14 years, Leigh Skipper is joining Duane Morris’ white-collar defense division at the end of June.

Skipper, who has served as chief federal defender for the Eastern District of Pennsylvania since 2009, is slated to join the firm’s Philadelphia headquarters June 27 after serving his last day at the federal community defender office on June 17. The move brings Duane Morris a public defender’s perspective in government investigations and commercial litigation following a slew of prosecutor-side hires.

To read the full text of this article, which originally appeared in The Legal Intelligencer, please visit the firm website.

Prosecution for Noncompliance with Agency Guidance Documents Allowed by Attorney General’s Memorandum

On July 1, 2021, U.S. Attorney General Merrick Garland published a memorandum that rescinds two previous memoranda―the Sessions Memorandum and Brand Memorandum―that prohibited Department of Justice attorneys from using noncompliance with federal agency guidance documents as a basis for civil and criminal enforcement cases. Garland’s memorandum states these previous policies were “overly restrictive,” “discouraged the development of valuable guidance” and hindered DOJ’s litigation of cases when relevant agency guidance was available.

To read the full text of this Duane Morris Alert, please visit the firm website.

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The opinions expressed on this blog are those of the author and are not to be construed as legal advice.

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