- Terraform Labs and Do Kwon were found liable for misleading investors before the UST stablecoin collapse in 2022.
- Do Kwon didn’t attend the trial, as he has been detained in Montenegro since March 2023.
Terraform Labs and Do Kwon Liable for Fraud
On April 5, 2024, a Manhattan jury found Singapore-based Terraform Labs and its Founder, Do Kwon, liable on fraud charges.
They agreed with the US Securities and Exchange Commission (SEC) that they had misled investors before their TerraUSD collapsed in 2022.
Notably, the SEC had accused Do Kwon and the Terraform Labs of misleading investors about the stability of TerraUSD.
Moreover, they also falsely claimed that Terraform’s blockchain was used in a famous Korean mobile payment app.
In her closing arguments, the SEC attorney Laura Meehan reiterated that Terraform Lab’s success story was built on lies.
If you swing big and you miss, and you don’t tell people that you came up short, that is fraud.
Laura Meehan, the SEC’s attorney, said in her closing arguments.
On the other hand, the defendant’s attorney told the jury that the SEC case depended on statements taken out of context.
And that the defendant had been truthful about their products and how they work, even when they failed.
Terra Ecosystem Crashed and Burned with Billions
In May 2022, Terra’s ecosystem collapsed, losing billions of dollars held by its investors.
Initially, Do Kwon designed TerraUSD and Luna, a more conventional token that fluctuated in value but was closely linked to TerraUSD.
Investors lost an estimated $40 billion on the two tokens when the TerraUSD peg to the dollar couldn’t be maintained.
The collapse turned the market into a frenzy, with other cryptocurrencies experiencing price downturns, including Bitcoin(BTC). It also led to other companies filing for bankruptcy in 2022. Terra Labs also filed for bankruptcy protection in Jan 2024.
During the fraud case, the regulatory watchdog accused Terra Labs and Do Kwon of lying to everyday investors.
They didn’t articulate the nature of the algorithm, in their direction, suggesting that it allowed UST to naturally heal. It also automatically self-heals in the event of a de-peg.
Surprisingly, they secretly arranged for a third-party TerraUSD purchase to spike its price when the stablecoin slipped from its peg before its collapse.
The SEC accused Kwon of falsely attributing the recovery to the reliability of TerraUSD’s algorithms. With this view, the regulatory watchdog seeks civil financial penalties.
Additionally, barring Do Kwon and Terraform Labs from the securities industry is required. The founder was not present at the SEC trial.
SEC Heightens Crackdown on Shady Crypto Moguls
Recently, the SEC has heightened the crackdown on shady moguls in the crypto market.
In Nov 2023, Binance and its founder were found guilty of money laundering and conspiracy. The largest exchange agreed to a settlement that required its founder to step down as the CEO of Binance.
Changpeng Zhao was also fined a staggering $175 million bond to stay out of prison as he awaits sentencing, which had been recently postponed to late April 2024.
Moreover, Ex-FFX CEO Sam Bankman Fried was sentenced to 25 years in prison last week. FTX exchange is still thick in contentious bankruptcy proceedings.
Gurbir Grewal, director of SEC’s division of enforcement, says they will continue using tools to protect the investing public. And, more importantly, ensure the crypto market comes into compliance.
What will be the next course of action for Terraform Labs and Do Kwon?
Susan Oh
Susan Oh is a leading figure in the integration of AI and blockchain for social good, serving as the CMO for BeOmni by Beyond Imagination and a civic technologist dedicated to creating scalable solutions. She is a board member of the Blockchain Commission For Sustainable Development supported by the UN GA Office of Partnerships, and a member of the Global Sustainability Network, a joint initiative by the Vatican and the Church of England to combat human trafficking. Recognized with the...
