Terraform and its co-founder, Do Kwon, were found responsible for civil fraud charges on Friday. The case was brought against them by the Securities and Exchange Commission (SEC) last year.
In February 2023, the SEC charged Terraform Labs and Kwon over the algorithmic stablecoin Terra USD, which collapsed dramatically a year earlier.
Civil Fraud Verdict Against Terraform Labs and Co-Founder Do Hyeong Kwon
A jury has found both Terraform Labs and its co-founder, Do Hyeong Kwon, guilty of misleading investors and liable for civil fraud, as reported by multiple sources. Deliberations commenced Friday afternoon following closing arguments from both parties earlier in the day, according to Coinage reports. The trial spanned two weeks.
In February 2023, the Securities and Exchange Commission (SEC) charged Terraform and Kwon regarding the algorithmic stablecoin Terra USD, which suffered a dramatic collapse a year prior.
The SEC alleged that the Singapore-based company and Kwon raised billions from investors through “offering and selling an inter-connected suite of crypto asset securities, many in unregistered transactions.”
Algorithmic stablecoins, such as Terra USD (UST), utilize market incentives through algorithms to maintain a stable price. Terra was linked to luna, a governance token, to ensure price stability. However, UST experienced a crash in May 2022, resulting in the loss of over $50 billion.
SEC Alleges Misleading Statements by Terraform and Kwon, Resulting in Civil Fraud
The Securities and Exchange Commission (SEC) asserted that Terraform and Kwon misled investors regarding the stability of UST. An instance cited was Kwon and his team’s assertion that a Korean payments company, Chai, utilized the Terraform blockchain for settling millions of transactions—a claim refuted by the SEC.
The jury scrutinized the SEC’s claims, focusing on whether Kwon and Terraform breached federal securities laws by perpetrating fraud in connection with Terraform securities trading. Judge Rakoff had previously ruled in favor of the SEC, granting summary judgment in its assertion that Terraform and Kwon offered and sold unregistered securities.
The first scheme under consideration by the jury involved the SEC’s allegation that Kwon falsely claimed Chai’s utilization of Terraform’s technology in its operations. The second scheme pertained to the SEC’s claim that the firm and Kwon made no false or misleading statements, according to Judge Jed Rakoff’s initial guidance to the jury.
Gurbir Grewal, the SEC’s Division of Enforcement Director, stated that Kwon and Terraform Labs’ deception regarding the stability of Terra USD resulted in significant losses for investors.
SEC and Terraform React to Civil Fraud Verdict
Gurbir Grewal, Director of the SEC’s Division of Enforcement, highlighted the tangible impact of the lack of registration and compliance in the cryptocurrency realm, stating, “For all of crypto’s promises, the lack of registration and compliance have very real consequences for real people.” He emphasized the SEC’s commitment to leveraging available tools to safeguard investors, underscoring the necessity for crypto markets to adhere to compliance standards.
In response to the jury’s verdict, a spokesperson for Terraform expressed disappointment, stating, “We are very disappointed with the verdict, which we do not believe is supported by the evidence.” The spokesperson asserted their belief that the SEC lacks the legal authority to initiate the case and indicated that Terraform is deliberating its options and next steps.
Do Kwon’s Legal Situation: Facing Charges in Multiple Countries
Do Kwon, co-founder of Terraform, was released from a prison in Montenegro last month but remains there due to facing criminal charges from several countries, including South Korea and the U.S. His legal team reportedly prefers his home country, where financial criminals typically face maximum sentences ranging from 30 to 40 years. In contrast, the U.S. legal system allows for consecutive sentences for each crime a defendant is found guilty of.
Kwon’s legal troubles began when he was arrested in Montenegro in March 2023 for using a counterfeit passport while attempting to leave the country. He agreed to be extradited to South Korea. Subsequently, in June 2023, a Montenegro court sentenced him to four months in prison for document forgery. Despite appealing the court’s decision, Kwon lost the appeal and was ultimately sentenced to serve four months in jail.
Important: Please note that this article is only meant to provide information and should not be taken as legal, tax, investment, financial, or any other type of advice.
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