Terraform Labs and Do Kwon found guilty as charged
5th April 2024
After a nine-day trial. A jury in Manhattan found Singapore-based Terraform Labs and its founder Do Kwon liable on civil fraud charges. The jury, agreeing with the U.S. Securities and Exchange Commission that they had misled investors before their stablecoin's 2022 collapse that shocked the entire cryptocurrency markets.
The jury delivered the verdict in federal court in the two-weeks trial after hearing closing arguments earlier in the day.
The SEC accused the company(Terraform Labs) and Do Kwon of misleading investors in 2021 about the stability of TerraUSD, a stablecoin designed to always maintain a pegged value of USD$1 using algorithmic mechanism instead of backed by actual assets like gold or fiat currencies. The regulator also accused them of falsely claiming Terraform Labs's blockchain was widely used in a popular Korean mobile payment app(CHAi).
Do Kwon designed TerraUSD and Luna, a more traditional token that fluctuated in value but was closely linked to TerraUSD. The SEC has estimated that investors lost more than $40 billion on the two tokens combined when the TerraUSD fell below peg and could not be maintained, leading to a death spiral in May 2022.
The SEC is seeking civil financial penalties and orders barring Do Kwon and Terraform Labs from the securities industry. U.S. District Judge Jed Rakoff will consider penalties in the coming weeks after hearing from the SEC and the defendants.
A spokesperson for Terraform Labs said the company is disappointed by the verdict and is weighing its options.
"We continue to maintain that the SEC does not have the legal authority to bring this case at all," the spokesperson added.
SEC Division of Enforcement Director Gurbir Grewal said the agency is pleased with the verdict.
"For all of crypto's promises, the lack of registration and compliance have very real consequences for real people," Gurbir Grewal said, adding, "it is high time for the crypto markets to come into compliance."
A lawyer for Do Kwon declined to comment.
The collapse of TerraUSD and Luna dragged down the value of other cryptocurrencies, including bitcoin, and caused wider destruction in the crypto market, leading several companies to file for bankruptcy in 2022.
Terraform Labs filed for bankruptcy protection in January 2024.
Do Kwon, who was arrested in Montenegro in March 2023, did not attend the trial, which began on 25th March 2024. Both the United States and South Korea, where Do Kwon is a citizen, have sought his extradition on criminal charges.
SEC attorney Laura Meehan told jurors during closing arguments that the platform's success story was "built on lies."
"If you swing big and you miss, and you don't tell people that you came up short, that is fraud," Laura Meehan said.
The SEC has said Do Kwon and Terraform Labs secretly arranged to have a third party(Jump Trading) purchase large amounts of TerraUSD to prop up the price when the stablecoin slipped from its peg a year earlier, in May 2021. Do Kwon falsely attributed the recovery to the reliability of TerraUSD's algorithms, according to the regulator.
The SEC also has said Do Kwon and Terraform Labs falsely touted Terraform Labs's blockchain as being used to process and settle transactions between customers and merchants on the CHAi payment app.
Louis Pellegrino, an attorney for Terraform Labs, said in closing arguments that the SEC's case relied on statements taken out of context and that Terraform Labs and Do Kwon had been truthful about their products and how they worked, even when they failed.
"Terraform is still out there, trying to rebuild and make purchasers whole," Louis Pellegrino said.
Earlier in the case, Terraform Labs argued that securities laws did not apply to the cryptocurrencies it developed. Judge Rakoff rejected that argument in December 2023, ruling that Terraform Labs unlawfully sold digital assets without registering them as securities.
After a final judgment in the case, Terraform Labs will be able to challenge that ruling on appeal.
Sources - Adapted from Reuters : Jody Godoy(Thomson Reuters)
