Terraform Labs and Do Kwon found liable for fraud in SEC case

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A New York jury has found Terraform Labs and its co-founder Do Kwon liable for defrauding cryptocurrency investors as part of a scheme that allegedly triggered a $40bn loss in market value.

The civil verdict, handed down after a nine-day trial in Manhattan federal court, is a win for the US Securities and Exchange Commission as the regulator has unleashed a crackdown on the cryptocurrency sector. The SEC last year sued the collapsed stablecoin operator and Kwon for allegedly raising billions of dollars from investors by selling several interlinked digital securities, many of which were not registered with regulators.

These assets included TerraUSD, a stablecoin developed by Kwon whose sudden collapse in 2022 rocked the crypto industry, as well as the associated luna token, according to the SEC.

Terraform and Kwon “caused devastating losses for investors and wiped out tens of billions of market value nearly overnight”, Gurbir Grewal, director of the SEC’s enforcement division, said on Friday following the verdict.

They “deceived investors about the stability of the crypto asset security and so-called algorithmic stablecoin TerraUSD, and they further misled investors about whether a popular payment application used Terraform’s blockchain to process and settle payments”, he added.

Terraform on Friday said: “We are very disappointed with the verdict, which we do not believe is supported by the evidence. 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.”

The agency’s chair Gary Gensler has increased scrutiny of a sector he has called a “Wild West” rife with non-compliance and misconduct. He has argued many digital tokens qualify as securities and fall under the SEC’s purview.

Grewal said: “For all of crypto’s promises, the lack of registration and compliance have very real consequences for real people.”

It also deals a fresh blow to Terraform and its South Korean chief executive, which have faced legal challenges after the breakdown of TerraUSD and luna, including criminal fraud charges.

Kwon, who resided in South Korea and Singapore at the time of the alleged fraud, is also in the midst of a fierce extradition battle. Wanted by the US and South Korea on criminal charges, he is being held in Montenegro and was not in attendance at the Manhattan civil trial.

In its complaint filed last year, the SEC accused Terraform and Kwon of masterminding a massive crypto fraud between April 2018 and May 2022, that allegedly resulted in a $40bn loss in market value.

The regulator had said the defendants marketed their digital assets with misleading statements, such as telling investors that a well-known South Korean mobile payment app used the Terra blockchain to settle transactions that would add value to the luna token.

Terraform filed for Chapter 11 bankruptcy protection in Delaware earlier this year.

A lawyer for Kwon did not immediately respond to requests for comment.