Jury Finds Terraform Labs and Do Kwon Guilty of Crypto Fraud
A jury in the United States District Court for the Southern District of New York has found Terraform Labs and its co-founder, Do Kwon, liable for defrauding investors in crypto asset securities.
The verdict, delivered after a nine-day trial, marks a significant victory for the Securities and Exchange Commission (SEC) in its efforts to regulate the cryptocurrency industry.
Key points:
- The jury found Terraform Labs and Do Kwon liable for civil fraud charges brought by the SEC.
- The SEC accused the defendants of misleading investors about the stability of the algorithmic stablecoin Terra USD (UST) and the use cases for the Terra blockchain.
- The collapse of UST in May 2022 wiped out tens of billions of dollars in market value nearly overnight.
Terraform Labs and Kwon were charged by the SEC in February 2023. The charges allege that they raised billions from investors by offering and selling an interconnected suite of crypto asset securities, many in unregistered transactions.
SEC highlighted that Do Kwon misled investors
The agency asserted that the defendants misled investors about the stability of UST, which used market incentives and algorithms to maintain a stable price.
During the trial, the SEC presented evidence that Kwon and his team had falsely claimed that a Korean payments company called Chai was using the Terraform blockchain to settle millions of transactions.
SEC attorney Laura Meehan revealed during her closing arguments that Jump Trading, an institutional investor, had made a secret deal with Kwon and Terraform Labs to rescue UST during a de-pegging event in May 2021.
Jump Trading reportedly bought millions of dollars of UST off-chain to reinflate its value and bring it back to parity with the dollar. Meehan argued that Kwon and his company intentionally kept Jump’s rescue mission quiet, using the re-pegging as evidence of the algorithm’s effectiveness.
Gurbir S. Grewal, the SEC’s Division of Enforcement Director, praised the jury’s verdict, stating, “We are pleased with today’s jury verdict holding Terraform Labs and Do Kwon liable for a massive crypto fraud. Terraform Labs and Kwon, its former CEO, deceived investors about the stability of the crypto asset security and so-called algorithmic stablecoin Terra USD.”
