A jury in Manhattan found Singapore-based Terraform Labs and its founder Do Kwon liable on civil fraud charges related to the collapse of their stablecoin in 2022. The US Securities and Exchange Commission accused them of misleading investors about the stability of TerraUSD and falsely claiming Terraform’s blockchain was used in a popular Korean mobile payment app. The SEC estimates that investors lost more than $40 billion on these tokens. The SEC is seeking civil financial penalties and orders barring Kwon and Terraform from the securities industry.
Following a two-week trial, the jury delivered the verdict in federal court after hearing closing arguments. US District Judge Jed Rakoff will consider penalties in the coming weeks after hearing from both the SEC and the defendants. Terraform filed for bankruptcy protection in January, and Kwon, who was arrested in Montenegro in March 2023, did not attend the trial. Both the US and South Korea have sought his extradition on criminal charges. The collapse of TerraUSD and Luna had a ripple effect on the wider crypto market, causing several companies to file for bankruptcy in 2022.
A spokesperson for Terraform expressed disappointment with the verdict and stated that the SEC does not have the legal authority to bring the case. The SEC Division of Enforcement Director emphasized the consequences of lack of registration and compliance in the crypto industry, calling for the market to come into compliance. A lawyer for Kwon declined to comment on the verdict. The SEC alleged that Kwon and Terraform manipulated the price of TerraUSD by arranging for a third party to purchase large amounts of it when it slipped from its peg in May 2021.
During closing arguments, the SEC attorney highlighted the platform’s success as being “built on lies” and accused Kwon and Terraform of committing fraud by not disclosing shortcomings. Terraform’s attorney rebutted these claims, stating that the company had been truthful about their products, even in failure, and was working to rebuild and compensate purchasers. Earlier in the case, Terraform argued that securities laws did not apply to their cryptocurrencies, but Rakoff rejected this argument in December. After a final judgment in the case, Terraform will have the opportunity to challenge this ruling on appeal.
