2024-04-09
On April 5th, a jury in Manhattan reached a verdict in a civil fraud case against Terraform Labs and its founder Do Kwon.
The jury agreed with the U.S. Securities and Exchange Commission (SEC) that the company and Kwon had misled investors before the collapse of their stablecoin in 2022, which sent shockwaves through cryptocurrency markets.
The SEC accused Terraform Labs and Kwon of deceiving investors in 2021 about the stability of their stablecoin, TerraUSD, which was designed to maintain a value of $1. They also alleged that the company falsely claimed that Terraform's blockchain was used in a popular Korean mobile payment app.
Kwon, as the architect behind TerraUSD and Luna, another token closely tied to TerraUSD, played a significant role in the case. According to the SEC, investors suffered losses of over $40 billion when the TerraUSD peg to the dollar could not be maintained in May 2022.
The SEC is now seeking civil financial penalties and orders to bar Kwon and Terraform from the securities industry. U.S.
District Judge Jed Rakoff will determine the penalties after hearing from both the SEC and the defendants.
Terraform expressed disappointment with the verdict and questioned the SEC's legal authority to bring the case.
They believe that the lack of registration and compliance in the crypto markets is a significant issue that needs to be addressed.
On the other hand, the SEC's Division of Enforcement Director, Gurbir Grewal, expressed satisfaction with the verdict and emphasized the consequences of non-compliance in the crypto markets.
Kwon's lawyer declined to comment on the verdict. It is worth noting that the collapse of TerraUSD and Luna not only affected their value but also caused turmoil in the broader crypto market, leading to multiple companies declaring bankruptcy in 2022.
Kwon, who was arrested in Montenegro in March 2023, did not attend the trial. Both the United States and South Korea are seeking his extradition on criminal charges.
During the closing arguments, the SEC attorney argued that the platform's success was built on lies and that failure to disclose shortcomings amounted to fraud.
The SEC claimed that Kwon and Terraform manipulated the price of TerraUSD by orchestrating the purchase of large amounts of the stablecoin when it deviated from its peg in May 2021.
Additionally, Kwon falsely attributed the recovery to the reliability of TerraUSD's algorithms, according to the SEC.
Furthermore, the SEC accused Kwon and Terraform of falsely promoting the use of Terraform's blockchain in processing transactions on the Chai payment app.
In response, Terraform's attorney argued that the SEC's case relied on statements taken out of context and that the company had been transparent about its products, even when they failed.
Terraform has plans to rebuild and compensate purchasers, as mentioned by their attorney. However, in a previous ruling, the court rejected Terraform's argument that securities laws did not apply to their cryptocurrencies.
After the final judgment, Terraform will have the opportunity to challenge this ruling on appeal.
Finally , the verdict reached by the jury in the civil fraud case against Terraform Labs and Do Kwon reflects the SEC's allegations of misleading investors and deceptive practices.
The consequences of the collapse of TerraUSD and Luna were significant, impacting the broader crypto market and leading to financial losses for investors. The penalties and orders sought by the SEC will be determined by U.S. District Judge Jed Rakoff, while Terraform plans to rebuild and compensate purchasers. This case highlights the importance of transparency, compliance, and accountability in the cryptocurrency industry as regulators seek to protect investors and maintain market integrity.
