A Manhattan jury on Friday found Singapore-based Terraform Labs and its founder Do Kwon liable on civil fraud charges, agreeing with the Securities and Exchange Commission that they misled investors before the collapse of their stablecoin in 2022 shocked cryptocurrency markets.
The jury returned the verdict in federal court after a two-week trial after hearing closing arguments earlier in the day.
The SEC accused the company and Kwon of misleading investors in 2021 about the stability of TerraUSD, a stablecoin designed to maintain the value of $1. The regulator also accused them of falsely claiming that Terraform's blockchain had been used in a popular Korean mobile payment app.
The platform's success story is “built on lies,” SEC lawyer Laura Meehan said during closing arguments.
“If you swing big and miss, and you don't tell people you failed, it's fraud,” Meehan said.
Louis Pellegrino, a lawyer for Terraform, told the jury on Friday that the SEC's case relied on statements taken out of context, and that Terraform and Kwon were honest about their products and how they worked, even when they failed.
“Terraform is still there, trying to rebuild and get buyers integrated,” he said.
The regulator is seeking civil monetary penalties and orders barring Kwon and Terraform from operating in the securities industry.
Kwon, who was arrested in Montenegro in March 2023, did not attend the trial that began on March 25. Both the United States and South Korea, where Kwon is a citizen, have requested his extradition on criminal charges.
Kwon designed TerraUSD and Luna, two more traditional tokens whose value fluctuated but were closely linked to TerraUSD.
The SEC estimates that investors lost more than $40 billion on the two tokens combined when TerraUSD's peg to the dollar could not be maintained in May 2022.
Its collapse also led to a decline in the value of other cryptocurrencies, including Bitcoin, and caused wider devastation in the cryptocurrency market, prompting several companies to file for bankruptcy in 2022.
Terraform itself filed for bankruptcy protection in January.
The SEC said Kwon and Terraform secretly arranged to have a third party buy large amounts of TerraUSD to prop up the price when the stablecoin backed away from its peg a year ago, in May 2021. Kwon falsely attributed the recovery to the reliability of TerraUSD's algorithms. , according to the organizer.
The SEC also said that Kwon and Terraform falsely promoted Terraform's blockchain technology as being used to process and settle transactions between customers and merchants on the Chai payment app.
Pellegrino said Friday that Terraform disclosed the need to defend the TerraUSD peg in May 2021. He said Chai used the company's blockchain, but the technical details of how it did that were not important to investors.
