New York Jury Finds Do Kwon, Terraform Labs Liable for Fraud in SEC Case

The SEC accused Kwon and his company of misleading investors about the stability of their so-called “algorithmic stablecoin” Terra USD.

AccessTimeIconApr 5, 2024 at 7:43 p.m. UTC
Updated Apr 8, 2024 at 6:09 p.m. UTC

NEW YORK – A Manhattan jury has found Terraform Labs and its co-founder, Do Kwon, liable on civil fraud charges brought by the U.S. Securities and Exchange Commission (SEC) in connection with the $40 billion implosion of the Terra ecosystem in May 2022, according to a Friday statement from the SEC.

The SEC accused Terraform Labs and Kwon of misleading investors about the stability of its so-called “algorithmic” native stablecoin, Terra USD (UST), and the use cases for the Terra blockchain.

The jury delivered the verdict on Friday, just two hours after lawyers for both the SEC and the defendants gave their closing arguments at the end of the nine-day trial in New York.

Jurors agreed with the SEC that Kwon and, under his direction, Terraform Labs deceived everyday investors about the nature of the supposed algorithm that kept UST pegged to the U.S. dollar. Though Kwon insinuated that it could “automatically self-heal” in the event of a de-peg, it actually relied on continuous trading activity, including large-scale trading done by institutional investors.

“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 director, wrote in a statement.

“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,” Grewal added.

SEC attorney Laura Meehan told the jury during her closing arguments on Friday 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, 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 added that, after Jump’s intervention, Kwon and his company intentionally kept the firm’s rescue mission quiet, wanting instead to use the re-pegging as evidence of the algorithm’s effectiveness.

Lawyers for Terraform Labs and Kwon attempted to wave Jump’s involvement away as a regular part of their relationship with Terraform Labs as a market maker. They said that all “reasonable” investors knew that the algorithm that kept UST pegged to the dollar was not a “magical machine” or “computer that functioned on its own” but instead, minting and burning done by market participants.

The jury, as evidenced by their verdict, did not agree.

A spokesperson for Terraform Labs told CoinDesk: “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.”

Kwon was not in Manhattan for his civil trial; instead, he was stuck in Montenegro, where he had been since his arrest in March 2023. Kwon was caught en route to Dubai attempting to use fake Costa Rican travel documents after months on the run.

Kwon also faces criminal charges in the U.S. and his native South Korea, which are tied to the implosion of the Terra ecosystem. Both countries are currently vying for his extradition, but his final destination remains unclear as Montenegro's Supreme Court weighs the competing requests.

UPDATE (19:10 UTC April 5): The story was updated to include a comment from a Terraform Labs spokesperson.


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Cheyenne Ligon

Cheyenne Ligon is a CoinDesk news reporter with a focus on crypto regulation and policy. She has no significant crypto holdings.

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