The civil fraud trial for Do Kwon, the controversial CEO of Terraform Labs, is set to begin on Monday, nearly two years after the company’s stablecoin crashed in value, resulting in $40 billion in losses for investors. The Securities and Exchange Commission (SEC) filed a lawsuit against Kwon and Terraform Labs in February 2023, accusing them of misleading investors about the stablecoin’s value and stability. The SEC alleges that Kwon and other executives spent billions to maintain the stablecoin’s value while claiming it was pegged to the U.S. dollar through an algorithm.
Kwon will not be present at the trial as he was released from prison in Montenegro after serving time for using a fake passport. Prosecutors have not returned his travel documents, complicating his ability to attend the trial. Kwon has faced legal troubles in multiple countries, including charges in South Korea for violating the Capital Markets Act and a class action lawsuit filed by investors in Singapore. He was also charged with securities fraud, wire fraud, and commodities fraud in the Southern District of New York.
After being arrested in Montenegro for attempting to use a forged passport, Kwon was sentenced to four months in prison. There were efforts by both the U.S. and South Korea to push for his extradition, with a court in Montenegro initially approving his extradition to South Korea. However, the Supreme Court of Montenegro overturned this decision, potentially opening the door for his extradition to the U.S. Kwon’s legal situation remains complex as multiple countries seek to prosecute him for his alleged involvement in the Terraform Labs scandal.
Terraform Labs managed two cryptocurrency tokens, TerraUSD (UST) and Luna. UST was marketed as an algorithmic stablecoin pegged to the U.S. dollar, while Luna served as a stabilizing mechanism to maintain UST’s peg by allowing investors to exchange UST for Luna when its value dropped. The SEC alleges that Kwon manipulated UST’s value by propping it up with billions of dollars through the Luna Foundation Guard. A third-party audit revealed that the foundation spent $2.8 billion to defend the peg, leading to the collapse of UST and significant losses for investors.
In addition to the stablecoin controversy, Terraform Labs also operated the Mirror Protocol, a virtual exchange where users could trade securities called mAssets that mirrored the prices of real stocks. However, these mAssets did not represent any ownership interest in the underlying securities, leading to questions about regulatory compliance. Kwon’s refusal to cooperate with the SEC’s investigation into the Mirror Protocol further complicates the legal challenges facing Terraform Labs and its executives.
As the civil fraud trial for Do Kwon and Terraform Labs gets underway, the legal saga surrounding the company’s stablecoin collapse and alleged securities violations continues to unfold. With multiple countries seeking to prosecute Kwon and his co-founders, the outcome of the trial could have significant implications for the future of cryptocurrency regulation and investor protection. Investors affected by the collapse of Terraform Labs’ stablecoin will be closely watching the proceedings as they seek accountability for their losses.
