Do Kwon and Terra Enter Final Chapter at SEC Fraud Trial

Nearly two years after Terra’s $40 billion collapse, the first trial in a string of looming litigation against the one-time crypto darling is entering its final chapter.

The civil fraud case brought by the Securities and Exchange Commission is wrapping up with just a few days remaining as Terraform Labs began its defense Tuesday afternoon by calling current CEO Chris Amani.

Defense attorneys representing Terra and Do Kwon have indicated they only intend to call a few witnesses before closing arguments begin as early as Thursday afternoon. They will have their work cut out for them to overcome the swath of evidence the SEC has already presented to the jury.

From the onset, this civil fraud case has only looked to settle two issues pertaining to the Terra collapse. Importantly, since this isn’t a criminal trial, there isn’t any prospect of jail time attached to the jury’s verdict. However, new evidence presented at this trial, and the way this jury interprets it, is certainly being closely watched by prosecutors in South Korea and the U.S. alike.

First, as Judge Rakoff’s jury instructions inform, the SEC is attempting to demonstrate that Terra falsely represented to investors that a well-known Korean company called "Chai" used Terraform's technology “to carry out its business, when in fact it did not.” 

Second, the SEC is attempting to show that Terra marketed its algorithmic stablecoin UST as being designed in such a way that its market value “would always automatically correct to $1.00, when in fact this was not true.”

Over the course of the trial, the SEC has mounted some substantial wins. On Tuesday, the SEC successfully argued to admit into evidence screenshots between Do Kwon and his Terra co-founder Daniel Shin that they argued were relevant to show the jury. The defense argued it had nothing to do with Chai or UST, and thus, nothing to do with either of the issues at trial.

A tweet from Amani last September when the conversation first surfaced revealed that the discourse was actually about Terra validators.

“This has nothing to do with Chai and isn't damning,” Amani tweeted. “This was a private conversation, (albeit an inelegant one) about the need to boostrap validators to ensure the security of the chain.”

Judge Rakoff sided with the SEC, and when Do Kwon’s mention of creating “fake transactions that look real” was read to the jury, there was an immediate reaction on the part of multiple jurors. Juror 3 turned to Juror 4, both men in their 30s, with a look of shock and awe that can only be described as watching a classmate get caught reaching into the cookie jar.

The SEC has also bolstered their case with powerful witness testimony, featuring multiple whistleblowers who filed complaints after Terra’s collapse.

Chai’s former Chief Product Officer Aaron Myung presented multiple recordings he secretly took, including one featuring Chai co-founder Daniel Shin. In general, the recordings revealed more insights into how Chai was not going to publicly challenge Do Kwon’s claims that the payments giant was using Terra’s blockchain.

Counter testimony presented by the defense via Terra’s Head of Infrastructure Paul Kim attempted to show that Chai transactions were, in fact, being mirrored to the Terra blockchain via a separate server.

The first prong of this case essentially comes down to how the jury interprets those transactions – and whether they believe they were misleadingly “copied” to the blockchain to show inflated activity, or whether they believe Kim’s testimony that mentioned the technology had been built in earnest to allow Chai to mirror payment transactions to the Terra blockchain.

Cybersecurity expert and Naxo co-founder Matthew Edman, who was called by the SEC as an expert witness, testified that the transactions created to mirror Chai payments accounted for more than 45% of token transfers or exchanges between users on the Terra blockchain from June 2019 to May 2022.

On Tuesday, the SEC called Rutgers economics professor Bruce Mizrach to testify to Jump Crypto’s role in restoring UST’s price to $1 in the 2021 de-peg. Both Jump Crypto President Kanav Kariya and Jump Trading co-founder Bill Disomma signaled they would invoke their Fifth Amendment protection against self-incrimination if called to testify.

Professor Mizrach’s testimony corroborated earlier testimony from former Jump software engineer James Hunsaker, who claimed Disomma directed Jump traders to deploy up to $200 million to defend UST after it dropped as far as 7 cents below its intended $1 peg in May 2021. According to his research for the SEC, UST would have dropped as low as $0 in that de-peg without Jump’s intervention.

“Without the Jump trading that I've analyzed in the Tether-UST pair and the Bitcoin-UST pair, my conclusion is that the price would have been very, very close to zero, and it's likely that [UST’s] peg would have never been restored,” Mizrach testified.

To begin their case, Terra’s and Do Kwon’s attorneys called Terra CEO Chris Amani to testify Tuesday afternoon. His testimony is set to resume Wednesday, followed by a few more witnesses ahead of closing arguments.

Judge Rakoff indicated closing arguments could come as soon as Thursday afternoon, if not Friday, before the jury begins its deliberations.

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Disclosure: Terraform Labs is one investor among many in Trustless Media, the production company behind Coinage.