A New York jury ruled Friday on the side of the U.S. Securities and Exchange Commission (SEC), convicting Terraform Labs and its founder Do-Kwon Kwon on civil fraud charges. Reuters report.
The SEC alleged that Terraform Labs and Kwon misled investors and made other unsubstantiated claims about the stability of the stablecoin TerraUSD. Terra’s failure led to $40 billion in losses and was cited as a major factor in triggering a widespread collapse in the cryptocurrency market.
The decision was handed down in federal court shortly after closing arguments were delivered after a two-week trial. Reuters note. The SEC is seeking civil and financial penalties and an injunction barring Kwon and Terraform from entering the securities industry. The May 2022 collapse of Luna, a token linked to TerraUSD, resulted in losses of more than $40 billion and caused widespread disruption in cryptocurrency markets.
Kwon, who was arrested in Montenegro in March 2023, did not attend the trial. Both the United States and South Korea have requested his extradition to face criminal charges. Terraform Labs filed for bankruptcy protection in January.
The SEC alleged that Kwon and Terraform secretly arranged for third parties to purchase large quantities of TerraUSD to maintain the peg to the dollar in May 2021, and that Kwon mistakenly attributed the recovery to the reliability of the TerraUSD algorithm. Regulators also alleged that Kwon and Terraform falsely promoted the use of blockchain in Chai, a popular South Korean payments app.
Terraform Labs’ attorneys and Kwon argued that the company told the truth about its products and features, even if they failed, and that the SEC’s case relied on statements taken out of context.
The company’s legal representation has previously been the subject of battles with regulators, with the SEC requesting a $166 million “slush fund” for its lawyers. Those lawyers fired back, calling the SEC’s action a “troubling example of government overreach” intended to “disadvantage and distract” them from the merits of the case.
Last December, one of the key remaining questions in the case was resolved when a federal judge ruled that Luna and UST were, in fact, securities subject to registration and other financial regulations.
