NY Judge Rejects SEC’s Efforts to Stymie Tron’s Arguments in Ongoing Securities Suit

Lawyers for the Tron Foundation and Justin Sun urged the court to reject the SEC’s “attempt to manufacture a controversy” over an argument in their effort to dismiss the case.

A New York judge has rejected a request from the U.S. Securities and Exchange Commission (SEC) to force a pre-trial conference or to require the filing of an additional response in its ongoing securities fraud lawsuit against the Tron Foundation and founder Justin Sun.

The SEC has accused lawyers for the Tron defendants – the Tron Foundation, Justin Sun, the BitTorrent Foundation and Rainberry (formerly known as BitTorrent) – of violating appropriate procedure by improperly advancing an argument in its defense.

In its letter to the court filed Aug. 12, the SEC accused the defense of trying to sneak in a new argument – that the sales of TRX and BTT did not meet the “common enterprise” prong of the Howey Test, the method used by the SEC to determine whether a transaction qualifies as an investment contract – after the Tron defendants had already filed their motion to dismiss on May 30.

Tron’s lawyers fired back against the SEC’s letter, writing their own missive to U.S. District Court Judge Edgardo Ramos of the Southern District of New York (SDNY), accusing the SEC of “attempt[ing] to manufacture a controversy” and urging the court to deny the SEC’s request for a pre-trial conference.

Lawyers for Tron reiterated that their defense largely hinges on their belief that the sales of BTT and TRX fail the Howey test’s third prong – the expectation of profits from the efforts of others – and argued that the SEC’s letter requesting leave to file an additional reply document (called a sur-reply) “mischaracterizes and disregards Defendants’ argument about Howey’s third prong in the context of this case (despite the point being in bold and italics).”

“Indeed, if the SEC is granted permission to file a sur-reply addressing the various common enterprise tests (which were not addressed in any prior pleading), Defendants will need sur-sur-reply to state our position on this new issue,” the letter from Tron’s attorney read. “In other words, the SEC asks for three pages to respond to an issue of its own devise.”

Ramos ultimately sided with Tron’s lawyers, ruling Monday to deny the SEC’s request.

“In light of defendants’ concession that they [are] not challenging the “common enterprise” element of the Howey test, the SEC’s letter motion to strike the untimely argument or for leave to file a sur-reply is DENIED.”

A representative for Tron declined to comment on “pending legal matters.”

The SEC filed its securities fraud lawsuit against the Tron Foundation, BitTorrent and Sun in January, alleging that the sales of TRX and BTT tokens were part of a $700 million unregistered securities offering.

The Tron defendants filed a motion to dismiss the case in May, arguing that the sales of TRX and BTT tokens do not meet the definition of an “investment contract” under the Howey Test and that the sales were exempt from registration under Section 4(a)(2) of the Securities Act.

The SEC has until Aug. 29 to file its opposition to the Tron defendants’ motion to dismiss.

Cheyenne Ligon is a CoinDesk news reporter with a focus on crypto regulation and policy. She has no significant crypto holdings.

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