Terra Founder Do Kwon Faces Fraud Charges in SEC Lawsuit

A Manhattan jury has delivered a verdict, finding Terraform Labs and its co-founder, Do Kwon, liable for civil fraud charges brought by the United States (US) Securities and Exchange Commission (SEC) related to the $40 billion collapse of the Terra ecosystem in May 2022, according to a statement released by the SEC on Friday.

The SEC accused Terraform Labs and Do Kwon of providing misleading information to investors regarding the stability of Terra USD (UST), the native stablecoin, and the potential use cases for the Terra blockchain.

The jury reached its decision just two hours after both the SEC and the defendants presented their closing arguments at the end of the nine-day trial in New York.

They agreed with the SEC's assertion that Do Kwon and Terraform Labs misled ordinary investors about the functionality of the algorithm purported to maintain the peg of UST to the US dollar.

Despite his suggestion that the algorithm could automatically correct itself during a de-peg, it was revealed that it relied on ongoing trading activity, including substantial transactions by institutional investors.

Gurbir Grewal, SEC Division of Enforcement director, wrote that:

"We are pleased with today's jury verdict holding Terraform Labs and Do Kwon liable for a massive crypto fraud."

Additionally, he pointed out that:

"The defendants caused devastating losses for investors and wiped out tens of billions of market value nearly overnight. For all of crypto’s promises, the lack of registration and compliance have very real consequences for real people. As the hard work of our team shows, we will continue to use the tools at our disposal to protect the investing public, but it is high time for the crypto markets to come into compliance."

The SEC attorney, Laura Meehan, highlighted during her closing arguments that Jump Trading, one of these institutional investors, had entered into a confidential agreement with Do Kwon and Terraform Labs to support UST during a de-pegging event in May 2021.

Jump Trading intervened by purchasing millions of dollars of UST off-chain to restore its value and bring it back in line with the dollar.

Laura further alleged that Do Kwon and his company intentionally kept Jump's involvement undisclosed, aiming to use the re-pegging as proof of the algorithm's efficacy.

In response, lawyers for Terraform Labs and Do Kwon attempted to downplay Jump's role, asserting that it was a standard part of their relationship with the company as a market maker.

They argued that "reasonable" investors understood that the algorithm behind UST was not a self-sufficient machine but rather relied on minting and burning actions performed by market participants.

However, the jury's verdict indicates disagreement with this perspective. Do Kwon, who was not present in Manhattan for the civil trial, has been residing in Montenegro since his arrest in March 2023.

He also faces criminal charges in the US and South Korea related to the Terra ecosystem's collapse.

Terraform Labs spokesperson explained:

“We are very disappointed with the verdict, which we do not believe is supported by the evidence. We continue to maintain that the SEC does not have the legal authority to bring this case at all, and we are carefully weighing our options and next steps."

Both countries are seeking his extradition, but the outcome remains uncertain as Montenegro's Supreme Court considers the competing extradition requests.