SEC Gets Major Setback in Tron Case as Judge Denies Request

The ongoing case between the Securities and Exchange Commission (SEC) and the Tron Foundation has taken a new turn today as a New York judge dismissed a request from the regulatory body to file an additional response or to force a pre-trial conference.

The SEC had charged Justin Sun and three of his companies, including Tron Foundation Limited, BitTorrent Foundation Ltd., and Rainberry Inc. (formerly BitTorrent) for allegedly offering unregistered securities in Tronix (TRX) and BitTorrent (BTT). Since the start of the case, the crypto community has been closely watching how it unfolds as its outcome could help bring much-needed clarity to the classification of crypto assets.

Court Rejects SEC Motion

In an August 12 filing, the securities watchdog alleged that the legal representatives of the defendants broke procedures by inappropriately adding an argument in its defense. The Commission argued that the defendants advanced new arguments regarding an element of the Howey Test, the ‘common enterprise.’

For context, the Howey Test is a framework used by the United States Supreme Court to check whether a transaction qualifies as an investment contract and should be regulated. According to the Howey Test, a transaction is considered an investment contract when four elements are met; an investment of money, in a common enterprise, with profit expectations, gotten from the efforts of others.

“It is improper for a party to raise a new argument for the first time in a reply brief. But that is what the Sun Defendants did here,” a part of the filing reads. “In their recent Reply in Support of their Motion to Dismiss the Amended Complaint, the Sun Defendants asserted a new argument—not made in their opening Memorandum—regarding the “common enterprise” prong of the Howey test.”

Consequently, the SEC requested the judge not to consider any new arguments for the pending motion to dismiss because it was only introduced in a reply brief. The SEC also asked alternatively that the court grant the agency a leave to file a sur-reply if it decides to consider the new arguments presented by the defendants.

However, Judge Edgardo Ramos of the Southern District of New York denied this request because the defendants conceded that they were not challenging the “common enterprise” element of the Howey test.

Defense Lawyers Reply SEC

Meanwhile, the lawyers representing Justin Sun and his enterprise replied to the commission stating that the regulator is trying to stir up controversy and that the court should deny its motion. The lawyers repeated that its defense is based on the fact that the sales of BTT and TRX did not pass the third point of the Howey Test that classifies securities when there is an expectation of profits from the efforts of others.

The lawyers added that the SEC’s request for leave to file an additional reply disregards the defendants’ arguments about the third point of the Howey Test. Moreover, they stated that if the court grants the SEC’s motion for a sur-reply, then the defendants will have to file for a sur-sur-reply to reiterate their position on the issue.

The legal battle between the SEC and Justin Sun and his enterprises began in March 2023. In a press release issued by the commission, Sun and his companies were also charged for allegedly carrying out wash trading to manipulate the secondary market for TRX.