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Reporting from New York: In response to civil fraud charges brought by the U.S. Securities and Exchange Commission (SEC) concerning the $40 billion implosion of the Terra ecosystem in May 2022, a Manhattan jury found Terraform Labs and its co-founder, Do Kwon, responsible. The SEC released a statement on Friday.
The SEC charged that Terraform Labs and Kwon had misled investors on the use cases for the Terra blockchain and the stability of its so-called “algorithmic” native stablecoin, Terra USD (UST).
Just two hours after the attorneys for the SEC and the defendants concluded the nine-day trial in New York with their closing arguments, the jury returned its judgment on Friday.
The jury concurred with the SEC that Kwon and Terraform Labs, acting on his behalf, misled ordinary investors on the characteristics of the purported algorithm that maintained UST’s peg to the US dollar.
Despite Kwon’s suggestion that it might “automatically self-heal” in the case of a de-peg, it depended on ongoing trading activity, including substantial institutional investor trading.
“We are pleased with today’s jury verdict holding Terraform Labs and Do Kwon liable for a massive crypto fraud,” Gurbir Grewal, SEC Division of Enforcement head, said in a statement.
“The defendants inflicted severe losses to investors, wiping off tens of billions of dollars in market value almost overnight. Despite all of crypto’s promises, a lack of registration and compliance has serious consequences for real people. As the hard work of our staff demonstrates, we will continue to employ the tools at our disposal to protect the investing public, but it is past time for the crypto markets to comply,” Grewal added.
During her closing arguments on Friday, SEC attorney Laura Meehan told the jury that one of those institutional investors, Jump Trading, had made a secret deal with Kwon and Terraform Labs to rescue UST during a de-pegging event in May 2021, by stepping in and buying millions of dollars of UST off-chain to reinflate its value and bring it back to parity with the dollar.
Meehan noted that, following Jump’s involvement, Kwon and his team purposefully kept the firm’s rescue mission quiet, preferring to use the re-pegging as proof of the algorithm’s efficiency.
Lawyers representing Terraform Labs and Kwon attempted to dismiss Jump’s involvement as a normal element of their relationship with Terraform Labs as market makers.
They said that all “reasonable” investors understood that the mechanism that maintained the UST tied to the dollar was not a “magical machine” or “computer that functioned on its own,” but rather minting and burning by market players.
The jury, as demonstrated by their verdict, disagreed.
A Terraform Labs spokeswoman told CoinDesk: “We are really upset with the ruling, which we do not believe is justified by the facts. We maintain that the SEC lacks the legal right to initiate this matter at all, and we are carefully considering our choices and next moves.”
Kwon was not in Manhattan for his civil trial; instead, he was detained in Montenegro since his arrest in March 2023. Kwon was apprehended on the way to Dubai while attempting to utilize forged Costa Rican travel documents after months on the run.
The fact of the matter is Kwon faces criminal charges in his native South Korea and the U.S., which connect to the collapse of the Terra ecosystem. His final destination is still unknown while the Supreme Court of Montenegro considers the dueling requests from both countries pushing for his extradition.
- Published By Team Genuine Reporter