Terraform Labs and its founder, Do Kwon, have been accused of creating a deceptive financial structure and making false claims about the stability of the cryptocurrency TerraUSD, as the civil fraud case filed by the U.S. Securities and Exchange Commission (SEC) begins in Manhattan.
SEC attorney Devon Staren told the jury that the company's actions resulted in significant investor losses when the value of TerraUSD plummeted.
According to the SEC, Kwon and Terraform Labs misrepresented the stability of TerraUSD, which was supposed to maintain a consistent value of $1. The agency also alleged that the company falsely claimed that its blockchain was integrated into a widely used Korean mobile payment application. Staren described Terraform's operations as fraudulent, likening it to a "house of cards" that, when it fails, results in near-total losses for investors.
Do Kwon, who is currently detained in Montenegro after his arrest in March, faces extradition to South Korea on criminal charges. His extradition was postponed last Friday due to procedural concerns raised by the Montenegrin prosecutor's office. Additionally, federal prosecutors in New York have charged him with fraud and are seeking his extradition to the United States.
The SEC estimates that investors lost over $40 billion in TerraUSD and its related token, Luna, when the stablecoin was not pegged to the dollar in May 2022. The collapse of these tokens also negatively affected other cryptocurrencies such as bitcoin and contributed to several crypto companies filing for bankruptcy that year.
The regulator alleged that Kwon and Terraform secretly manipulated the price of TerraUSD by arranging third-party purchases to prop up the coin's value as it plummeted in May 2021, falsely attributing the recovery to the coin's algorithmic stability.
The SEC also alleges that Kwon and Terraform falsely represented Terraform's blockchain as being used in the Chai payment application to process transactions.
Kwon and Terraform denied these allegations, stating that the SEC misinterpreted statements made by Kwon and other company employees. The SEC is seeking civil penalties and seeking to ban Kwon and Terraform from the securities industry.
In December, U.S. District Judge Jed Rakoff ruled in favor of the SEC on one count, ruling that Terraform Labs had illegally sold digital assets without registering them as securities. But the judge rejected the SEC's allegations regarding illegal offerings of security-based exchanges through Terraform's platform.
The amount of compensation to be paid by Terraform, which filed for bankruptcy protection in January, has not yet been determined by the court. Terraform noted that any fines could exceed the company's current assets.
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