Terraform Labs and Do Kwon Found Liable for Fraud

Terraform Labs and its co-founder, Do Kwon, were found liable for securities fraud in a Manhattan court on Friday — nearly two years after UST and LUNA’s $45 billion implosion blindsided the crypto market.

While a jury of seven New Yorkers knew nothing about crypto just two weeks before, they had heard enough from the Securities and Exchange Commission to find that Terraform Labs and Do Kwon made misrepresentations about the company’s stablecoin UST. 

The SEC successfully argued that Do Kwon and his firm materially misinformed the public about the ill-fated stablecoin’s ability to maintain a $1 peg — for years — before it eventually collapsed in 2022. That included undisclosed help the company received from the trading firm Jump Crypto in 2021, which helped UST regain its dollar peg.

Additionally, Kwon and Terraform Labs were found liable for material omissions about Terra’s use. At trial, the SEC set out to convince the jury that the South Korean payments app Chai never actually used the blockchain for transactions, despite claims that Kwon made.

All in all, the misrepresentations made Terra appear more successful and stable than it ever actually was, according to the SEC, whether that was through mirrored transactions or its agreement with Jump Crypto to serve as a market maker for its tokens. As for the defense, they argued the risks with Terra were always transparent.

“You have all the tools that you need to find the defendants liable for securities fraud,” a lawyer for the SEC said just before the jury deliberated. In total, it took the group of New Yorkers just a few hours to make the determination.

Over the course of the trial, defense lawyers for Kwon and Terraform Labs sought to portray UST’s collapse as a failure and not fraud. Claiming the algorithmic stablecoin suffered a “short attack,” and that the company is trying to make things better for its community with the release of LUNA 2.0, lawyers said that Terraform Labs had been open in standing by the project.

“Do Kwon and Terra never tried to hide their failures from you,” one defense lawyer said. “[The SEC] told you that [Terra] was a house of cards … None of that was true.”

Meanwhile, Kwon awaits a decision in Montenegro that’ll determine whether he’s extradited to his home country of South Korea or the U.S. to face criminal charges in relation to UST’s collapse. On Friday, Montenegro's Supreme Court overturned a lower decision, per The Block.

"We are very disappointed with the verdict, which we do not believe is supported by the evidence," a Terraform Labs spokesperson said in a statement. "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.”

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