Terraform Labs and Founder Do Kwon Found Liable in US Civil Fraud Trial

In a landmark decision, a jury in Manhattan has found Terraform Labs and its co-founder, Do Kwon, liable on civil fraud charges, concurring with the U.S. Securities and Exchange Commission’s (SEC) allegations of misleading investors. The trial, which lasted two weeks, concluded with the jury delivering the verdict after hearing closing arguments from both sides.

The SEC accused Terraform Labs and Kwon of deceiving investors about the stability of TerraUSD, an algorithmic stablecoin designed to maintain a value of $1. Additionally, they were accused of falsely claiming that Terraform’s blockchain was integrated with a popular Korean mobile payment app. The collapse of TerraUSD in May 2022 led to significant losses estimated at over $40 billion, triggering turmoil in the cryptocurrency market.

Despite Terraform’s claims of the SEC lacking legal authority to bring the case, the jury’s decision holds Terraform and Kwon liable for civil fraud charges. The SEC seeks civil financial penalties and orders barring Kwon and Terraform from the securities industry. U.S. District Judge Jed Rakoff will consider penalties in the coming weeks, following submissions from both the SEC and the defendants.

The collapse of TerraUSD and its associated token, Luna, not only caused substantial losses for investors but also contributed to a broader downturn in the cryptocurrency market. Several companies, including Terraform Labs, filed for bankruptcy protection in the aftermath of the collapse.

Kwon, who has been at the center of the legal battle, remains embroiled in extradition proceedings between the United States and South Korea. Following his arrest in Montenegro in March 2023 for using falsified travel documents, both countries have sought his extradition on criminal charges. Kwon’s absence from the trial underscores the complexities surrounding his legal situation and extradition status.

During the trial, SEC attorneys characterized Terraform as a “house of cards,” alleging that its success story was “built on lies.” They claimed that Kwon and Terraform secretly orchestrated actions to maintain TerraUSD’s peg to the dollar and falsely attributed its recovery to the stability of TerraUSD’s algorithms.

In contrast, attorneys for Terraform Labs and Kwon argued that the SEC’s case relied on statements taken out of context. They maintained that Terraform had been transparent about its products and functionalities, even in the face of failure.

The jury’s verdict marks a significant milestone in the ongoing legal saga surrounding Terraform Labs and Do Kwon. As the cryptocurrency industry grapples with increased regulatory scrutiny, the outcome of this trial underscores the importance of transparency and compliance in the digital asset space.

While Terraform Labs expressed disappointment with the verdict, the SEC hailed the decision as a victory for investor protection and emphasized the need for compliance within the crypto markets. As the industry navigates evolving regulatory landscapes, the implications of this case extend beyond Terraform Labs, serving as a cautionary tale for market participants and highlighting the imperative of regulatory adherence in safeguarding investor interests.