Terraform Labs and Do Kwon Found Liable for Civil Fraud

A Southern District of New York jury has found Terraform Labs and Do Kwon liable for civil fraud, ruling that they misled investors and acted recklessly. The SEC's Enforcement Director emphasized the need for compliance in the digital asset industry and highlighted the consequences of non-compliance. Terraform Labs, while expressing disappointment, is considering its options and next steps, while Kwon remains in Montenegro awaiting sentencing.

Jury Finds Terraform Labs and Do Kwon Liable for Civil Fraud

New York, April 7, 2023 - In a landmark verdict, a jury in the United States Southern District of New York has found Terraform Labs and its co-founder, Do Kwon, liable for civil fraud. The jury concluded that the defendants deliberately misled investors, disregarded due diligence, and breached their fiduciary responsibilities.

SEC Alleges Deception and Recklessness

The Securities and Exchange Commission (SEC) initiated the lawsuit against Terraform Labs and Kwon, alleging that they made false and misleading statements about the stability of TerraUSD (UST), an algorithmic stablecoin that was pegged to the US dollar. Furthermore, the SEC asserted that the defendants failed to disclose material risks associated with UST and operated without proper compliance and registration.

Gurbir Grewal, Director of the SEC's Division of Enforcement, emphasized the severity of the verdict, stating, "Terraform Labs and Kwon, its former CEO, deceived investors about the stability of the crypto asset security and so-called algorithmic stablecoin Terra USD." Grewal stressed the consequences of noncompliance in the digital asset industry, highlighting the need for increased adherence to regulations.

Collapse of Terra Ecosystem

In May 2022, the Terra ecosystem, which included LUNA and UST, experienced a catastrophic collapse. UST lost its $1 peg, triggering a downward spiral in the prices of both tokens. The ensuing panic and mass withdrawals resulted in a loss of approximately $40 billion for investors.

Jury's Unanimous Decision

Following extensive deliberations that commenced last Friday, the jury reached a unanimous decision against Kwon. The verdict represents a significant victory for the SEC and sends a strong message to the burgeoning cryptocurrency industry.

Terraform Labs Expresses Disappointment

A spokesperson for Terraform Labs expressed disappointment with the verdict, claiming that it lacked evidentiary support. The company indicated that it will carefully consider its options and potential next steps.

Kwon Remains in Montenegro

Despite being released from jail in Montenegro, Kwon remains in the country due to an outstanding warrant for his arrest in South Korea. He will await sentencing in Montenegro, where he was initially detained in March 2023.

SEC's Continued Cryptocurrency Investigations

The SEC's pursuit of Terraform Labs and Kwon underscores its ongoing efforts to regulate the cryptocurrency market. The agency has recently intensified its scrutiny of digital asset exchanges, lending platforms, and other industry players, seeking to protect investors from fraud and manipulation.