On March 23, 2024, Terraform Labs co-founder Do Kwon was escorted by a police officer in Podgorica, Montenegro, while serving a sentence for document forgery.
Stevo Vasilevich Reuters
A Manhattan jury on Friday found Singapore-based Terraform Labs and its founder Do Kwon liable on civil fraud charges, agreeing with the U.S. Securities and Exchange Commission that they misled before its stablecoin’s 2022 collapse rocked the cryptocurrency market. investors.
The verdict came after a two-week trial in federal court after a jury heard 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. Regulators also accused them of falsely claiming that Terraform’s blockchain was used in South Korea’s popular mobile payments app.
SEC attorney Laura Meehan said in 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 you’re not doing well, that’s fraud,” Meehan said.
Terraform attorney Louis Pellegrino 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 if they failed.
“Terraform is still there, trying to rebuild and make buyers whole,” he said.
Regulators are seeking civil financial penalties and orders barring Kwon and Terraform from entering the securities industry.
Kwon was arrested in Montenegro in March 2023 and did not attend the trial that began on March 25. The United States and South Korea, where Kwon is a citizen, have both sought his extradition on criminal charges.
Kwon designed TerraUSD and Luna, a more traditional token whose value fluctuates but is closely related to TerraUSD.
On April 14, 2022, Do Kwon, co-founder and CEO of Terraform Labs, at the company’s office in Seoul, South Korea.
Cao Yuhai | Bloomberg | Getty Images
The U.S. Securities and Exchange Commission estimates that due to the inability to maintain TerraUSD’s peg to the U.S. dollar in May 2022, investor losses in both tokens totaled more than $40 billion.
Their collapse has also dragged down the value of other cryptocurrencies, including Bitcoin, and caused broader disruption to the crypto market, leading several companies to file for bankruptcy in 2022.
Terraform itself filed for bankruptcy protection in January.
The SEC said that Kwon and Terraform secretly arranged for third parties to purchase large amounts of TerraUSD to support the price of the stablecoin when it left its peg a year ago, in May 2021. Kwon mistakenly attributed the price recovery to the reliability of the TerraUSD algorithm, according to the regulator.
The SEC also said Kwon and Terraform falsely promoted Terraform’s blockchain for use in processing and settling transactions between customers and merchants on the Chai payment app.
Pellegrino said on Friday that Terraform had disclosed that the TerraUSD peg would need to be defended in May 2021. He said Chai already uses the company’s blockchain, but the technical details of how it operates are not important to investors.
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