New York – The U.S. Securities and Exchange Commission (SEC) recently concluded their case against Terraform Labs and its co-founder, Do Kwon, leaving the decision in the hands of a New York jury. The jury must now determine whether Kwon and his company can be held accountable for allegedly providing misleading information to investors regarding the stability of their cryptocurrency, Terra USD (UST), and its integration with a South Korean mobile payments app.
Terra USD, also known as an “algorithmic stablecoin,” was designed to be pegged to the U.S. dollar through on-chain mint-and-burn mechanics with its sister token, LUNA. However, in May 2022, the UST experienced a de-peg and subsequently entered into a death spiral, causing over $40 billion in market value losses for the entire Terra ecosystem.
Throughout the trial, the SEC contended that Kwon and Terraform Labs intentionally deceived investors by implying that their algorithm could naturally and automatically restore the peg of UST. The SEC argued that in reality, the value of UST was maintained through active trading, including significant trades conducted by institutional investors. According to SEC attorney Laura Meehan, Kwon and his company went as far as making a secret agreement with a trading shop called Jump to purchase millions of dollars worth of UST off-chain during a previous de-peg in May 2021. They then allegedly kept Jump’s involvement undisclosed, aiming to present the re-pegging as evidence of the algorithm’s effectiveness.
As the SEC’s case neared its conclusion, a 4.8 magnitude earthquake in neighboring New Jersey caused a subtle shake in the Manhattan courtroom, amusingly noted by District Court Judge Jed Rakoff. The defense, represented by attorney Louis Pellegrino, then presented its closing arguments. Pellegrino emphasized that the mobile payment app Chai did indeed utilize the Terra blockchain for various purposes, including refunding purchases and providing liquidity. He also focused on the alleged secret agreement with Jump and disputed whether Kwon and Terraform Labs had truly deceived investors regarding the algorithm’s nature.
Pellegrino argued that the peg maintenance required participation from market participants, including Jump, which he claimed had a formal agreement, not a secret one, to provide liquidity to Terraform Labs when needed. He asserted that reasonable purchasers were aware of the inherent risks, as evidenced by a trading memo from Galaxy Digital. Pellegrino concluded by suggesting that the collapse of the Terra ecosystem resulted from a short attack carried out by hedge funds, leaving Terraform Labs and its investors as victims.
Terraform Labs filed for bankruptcy protection in January, and during the trial, CEO Chris Amani testified that the company still had approximately $150 million in assets. Meanwhile, former CEO Do Kwon, who faces both civil and criminal fraud charges, was absent from court. After being arrested with fake Costa Rican travel documents in March 2023, Kwon served a prison sentence in Montenegro. He has since been released on bail and is currently under house arrest, with the country’s Supreme Court considering extradition requests from the United States and South Korea.
The jury will now deliberate on the SEC’s case against Terraform Labs and Do Kwon, determining whether they are liable for allegedly misleading investors and causing significant losses in the Terra ecosystem. Kwon’s future whereabouts and ultimate fate remain uncertain.