SEC Case Finds Terraform Labs and Do Kwon Guilty of Fraud

A jury has determined that Terraform Labs and its co-founder, Do Kwon, are responsible for defrauding investors in their civil case with the United States Securities and Exchange Commission.

According to an announcement made on April 5 by SEC Enforcement Director Gurbir Grewal, jurors at the U.S. District Court for the Southern District of New York reached the verdict of liability against Kwon and Terraform in the civil enforcement case after a brief deliberation. The SEC trial commenced on March 25, although Kwon was not present, as he remains in Montenegro while courts assess whether to approve an extradition request from either the U.S. or South Korea.

“We are pleased with today’s jury verdict holding Terraform Labs and Do Kwon liable for a massive crypto fraud,” remarked Grewal. “Terraform Labs and Kwon, its former CEO, deceived investors about the stability of the crypto asset security and so-called algorithmic stablecoin Terra USD, and they further misled investors about whether a popular payment application used Terraform’s blockchain to process and settle payments.”

Grewal highlighted the significant impact of Terraform’s failure to register with the regulator, emphasising the tangible consequences for investors and emphasising the importance of compliance. Throughout the trial, SEC attorneys compared the platform to a precarious “house of cards” and accused both the company and Kwon of deceiving investors.

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

As per the verdict submitted in the U.S. District Court for the Southern District of New York on April 5, jurors concluded that Kwon and Terraform were accountable for six charges. Additionally, they deemed the platform’s conduct as “reckless” in disseminating false or deceptive information concerning the offer or sale of TerraUSD (UST), Luna, or wLUNA.

In May 2022, Terraform Labs experienced a collapse due to the instability of its algorithmic stablecoin, UST, and other concerns surrounding the blockchain’s applications. This failure likely contributed to a significant downturn in the crypto market, prompting bankruptcy filings from companies such as FTX, BlockFi, and Celsius.

The SEC initiated a lawsuit against Terra and Kwon in February 2023, accusing them of orchestrating a multi-billion dollar crypto asset securities fraud. The outcome of this civil case could have wide-ranging implications for crypto firms operating in the U.S. In December, Judge Jed Rakoff ruled partially in favour of Terraform regarding the unregistered offer and sale of security-based swaps.

The implications for Kwon’s extradition from Montenegro remain uncertain. As of April 5, following a decision by the country’s Supreme Court, his case has been referred back to a lower court to determine whether extradition to the U.S. or South Korea will be granted. Kwon faces criminal charges in both jurisdictions.