SEC Alleges 'House of Cards' Fraud by Terraform Labs and Do Kwon in Manhattan Trial

In the SEC's civil fraud trial against Terraform Labs and its founder, Do Kwon, the SEC alleges that the defendants misled investors about the stability of TerraUSD, a stablecoin that was supposed to maintain a value of $1. The SEC also claims that Terraform falsely represented that its blockchain was used in a popular Korean mobile payment app. Kwon's attorney argues that the SEC's case relies on selective evidence and that Terra's cryptocurrency was never presented as risk-free.

SEC Accuses Terraform Labs and Do Kwon of "House of Cards" Fraud in Manhattan Trial

On Monday, the Securities and Exchange Commission (SEC) commenced a civil fraud trial in Manhattan, alleging that Terraform Labs and its founder, Do Kwon, perpetrated a "house of cards" by misrepresenting the stability of TerraUSD (UST), a stablecoin designed to maintain a value of $1. The SEC further asserts that Terraform falsely claimed its blockchain was utilized in a popular Korean mobile payment app.

SEC attorney Devon Staren opened the trial with a scathing indictment, declaring that "Terra was a fraud, a house of cards, and when it collapsed, investors lost nearly everything." In contrast, Terraform's attorney, Louis Pellegrino, dismissed the SEC's case as relying on selective evidence and the testimony of potential whistleblower informants. Kwon's attorney, David Patton, emphasized that Kwon never portrayed Terra's cryptocurrency as risk-free.

Kwon's Absence and Extradition Proceedings

Do Kwon is notably absent from the trial as he was arrested in Montenegro in March 2023 and is currently awaiting extradition to South Korea, where he faces criminal charges. A Montenegro court recently delayed his extradition, citing concerns raised by the prosecutor's office. Federal prosecutors in New York have also charged Kwon with fraud and are seeking his extradition to the United States.

The TerraUSD Collapse and its Market Impact

Kwon conceived both TerraUSD and Luna, a volatile token linked to TerraUSD. The SEC estimates that investors lost over $40 billion in these two tokens when TerraUSD's peg to the dollar failed in May 2022. The collapse not only dragged down the value of other cryptocurrencies, including Bitcoin, but also wreaked havoc in the broader crypto market, leading to multiple company bankruptcies.

SEC's Allegations of Market Manipulation and Misrepresentation

The SEC alleges that Kwon and Terraform secretly arranged for a third party to purchase large amounts of TerraUSD to prop up its price when the stablecoin deviated from its peg in May 2021. The regulator contends that Kwon falsely attributed the recovery to the robustness of TerraUSD's algorithms.

Additionally, the SEC claims that Kwon and Terraform falsely advertised Terraform's blockchain as the processor of transactions on the Chai payment app. Terraform and Kwon have denied any wrongdoing and assert that the SEC has taken their statements out of context.

SEC's Remedies and Legal Precedents

The SEC is seeking civil financial penalties and injunctions barring Kwon and Terraform from the securities industry. In December, US District Judge Jed Rakoff granted the SEC a partial victory by ruling that Terraform Labs had illegally sold digital assets without registering them as securities. However, the judge dismissed the SEC's allegations that Terraform and Kwon offered illegal security-based swaps.

The amount of damages that Terraform must pay has yet to be determined, but the company, which filed for bankruptcy protection in January, has indicated that a penalty could exceed its assets. The trial is expected to continue for several weeks, and its outcome will have significant implications for the cryptocurrency industry and the regulation of digital assets.