A jury in Manhattan found Terraform Labs and its founder Do Kwon liable on civil fraud charges for misleading investors before the collapse of their stablecoin, TerraUSD, in 2022. The SEC accused them of falsely claiming TerraUSD was stable at $1 and that Terraform’s blockchain was used in a popular Korean payment app. Kwon designed TerraUSD and Luna, and the SEC estimated over $40 billion in losses when TerraUSD could not maintain its peg to the dollar. The SEC is seeking financial penalties and industry bans for Kwon and Terraform, pending a decision from US District Judge Jed Rakoff.
Terraform expressed disappointment with the verdict and is considering its options, maintaining that the SEC lacks the legal authority to pursue the case. The SEC, on the other hand, is pleased with the jury’s decision, emphasizing the need for compliance in the crypto markets. Kwon’s lawyer declined to comment, and the collapse of TerraUSD and Luna had far-reaching effects, causing other cryptocurrencies to plummet and leading to bankruptcy filings from various companies, including Terraform. Kwon, a citizen of both the United States and South Korea, was arrested in Montenegro and faces extradition on criminal charges.
During closing arguments, the SEC attorney emphasized that Terraform’s success was based on deception, with statements taken out of context to present a false narrative of the stability of TerraUSD. The SEC alleged that Kwon and Terraform artificially inflated the price of TerraUSD through third-party purchases and misleading claims about the utility of Terraform’s blockchain. Terraform’s attorney argued that the company had been transparent about its products, even when they failed, and was working to rebuild and compensate purchasers.
Terraform previously argued that securities laws did not apply to their cryptocurrencies, but this argument was rejected by Judge Rakoff, who ruled that the company had unlawfully sold digital assets without registering them as securities. After the final judgment, Terraform will have the opportunity to appeal this ruling. The trial began in March 2023, and the prosecution presented evidence of fraudulent practices leading up to the collapse of TerraUSD in May 2022. The jury found in favor of the SEC, holding Terraform and Kwon accountable for misleading investors and causing significant financial losses in the cryptocurrency market.
In the aftermath of TerraUSD’s collapse, the wider crypto market experienced turmoil, with ripple effects felt across various digital assets. Terraform’s bankruptcy filing and Kwon’s arrest added to the chaos, highlighting the risks and consequences of fraudulent practices in the industry. The SEC’s victory in this case signals a commitment to enforcing regulations and holding individuals and companies accountable for misconduct in the cryptocurrency space. The implications of this verdict extend beyond Terraform and Kwon, serving as a warning to others engaged in deceptive practices in the digital asset market.
