The SEC’s Trial Against Do Kwon and Terra All Comes Down To This

The civil trial between the Securities and Exchange Commission and Terraform Labs co-founder Do Kwon kicked off in Manhattan court today, with fireworks fired from both sides.

In opening arguments taking place in the Southern District of New York —  floors below the courtroom where Sam Bankman-Fried’s crypto empire was laid bare months ago — the SEC did their best to reprise the same strategy of dumbing things down for the jury.

“This is a case about fraud,” SEC attorney Devon Staren said, assuring the jury they need not get bogged down in understanding the intricacies of crypto, blockchain, or algorithmic stablecoins to grasp the alleged fraud. “This trial is not about the technology.”

As defense attorneys representing Kwon and Terraform Labs delivered their respective opening arguments, they took the exact opposite approach from the SEC. Defense attorney David Patton used his time to paint Terraform Labs as “a new company using new technology,” and stressed that failing at an ambitious attempt to improve the financial system isn’t fraud in and of itself. (That argument very closely matches what Coinage learned in our award-winning exclusive interview with Kwon last year – the first interview he gave after Terra’s $40 billion implosion.)

“Failure doesn’t equal fraud,” Patton said simply.

But for the jury, Judge Rakoff carefully explained what two key questions this case boils down to. (If you watched Coinage’s Terra coverage, you would already know our line of questioning focused on both.) First, the SEC is setting out to show that Terraform and Kwon misrepresented the adoption of Terra’s stablecoin as a payment option used by Chai, Terra’s sister payments company that was described Monday by the SEC as “a Korean PayPal.” And second, the SEC will also attempt to show that Terra misrepresented the technology that sought to keep its UST stablecoin pegged to a dollar.

"Terra was a fraud, a house of cards, and when it collapsed, investors lost nearly everything," SEC attorney Staren said, showing a few slides with the titles “The Chai Fraud” and “The Jump Fraud,” which referred to undisclosed support for UST that came from the crypto fund Jump Crypto the first time UST depegged from $1. The SEC will attempt to argue that Terra oversold its technology and algorithm and misrepresented risks to investors.

Kwon was noticeably absent at trial and is not expected to attend at any point over the next two weeks that Judge Rakoff estimates the back and forth might take. Kwon was arrested in Montenegro in March 2023 for traveling with a forged passport and is facing competing extradition requests to his native South Korea and the U.S. to face criminal charges. On Friday, a Montenegro court once again delayed his extradition after the prosecutor's office challenged the process that reversed an earlier decision to extradite Kwon to the United States.

Now, in what is mostly seen as a dry run for a potential criminal trial, the SEC plans to show Terra and Do Kwon knew more about the instability of their stablecoin than what they were publicly projecting. 

Whether or not that’s true, or constitutes fraud, will be decided by a jury of nine New Yorkers who have never touched cryptocurrency. The jury of six women and three men was finalized after other potential jurors — including a man who bought thousands of dollars worth of Bitcoin and Ethereum, and a woman who sat on a jury who failed to reach a verdict on a case about whether a defendant had intent to use counterfeit money — were dismissed. 

Watch Kwon respond directly to our questions about Terra’s collapse in the clip above.

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