A jury in the US District Court for the Southern District of New York found Terraform Labs and its co-founder, Do Kwon, liable for defrauding investors in crypto asset securities.
The ruling, handed down after a nine-day trial, represents a major victory for the SEC in its efforts to regulate the cryptocurrency industry.
the main points:
- The jury found Terraform Labs and Do Kwon liable on 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 of the Terra blockchain.
- UST's collapse in May 2022 wiped out tens of billions of dollars in market capitalization almost overnight.
Terraform Labs and Kwon were indicted by the Securities and Exchange Commission in February 2023. The charges allege that they raised billions from investors by offering and selling an interconnected array of crypto asset securities, many of them in unregistered transactions.
The SEC highlighted that Do Kwon misled investors
The agency asserted that the defendants misled investors about the stability of UST, who used market incentives and algorithms to maintain a stable price.
During the trial, the SEC presented evidence that Kwon and his team falsely claimed that a Korean payments company named Chai was using the Terraform blockchain to settle millions of transactions.
SEC lawyer Laura Meehan revealed during her closing arguments that Jump Trading, an institutional investor, had struck a secret deal with Kwon and Terraform Labs to bail out UST during the May 2021 decoupling event.
Jump Trading reportedly bought millions of dollars of UST off-chain to re-inflate its value and bring it back to parity with the dollar. Meehan argued that Kwon and his company deliberately kept the Jump rescue mission quiet, using the reconnection as evidence of the algorithm's effectiveness.
Gurbir S. praised Grewal, Director of the SEC's Enforcement Division, commented on the jury's ruling saying: “We are pleased with today’s jury ruling holding Terraform Labs and Do Kwon liable for a massive cryptocurrency fraud. Terraform Labs and Kwon, its former CEO, deceived investors about the stability and security of crypto assets and the so-called algorithmic stablecoin Terra USD.
