Terraform Labs Pte. faces trial on Monday over civil fraud claims related to the 2022 collapse of its TerraUSD stablecoin, while co-founder Do Kwon awaits extradition in Montenegro.
The US Securities and Exchange Commission alleges fraud in the case, which led to a $40 billion loss in investor assets and impacted the crypto industry, even causing the failure of the FTX crypto exchange.
Legal Confrontations Shake Crypto Industry
The trial of Terraform Labs Pte. marks the latest in a series of high-profile legal battles, as US prosecutors and regulators aim to assert more control over the crypto industry. Meanwhile, on Thursday, a judge in the same federal courthouse will determine the sentence for Sam Bankman-Fried, convicted in November of a massive fraud at FTX.
Do Kwon, co-founder of Terraform Labs Pte., faces criminal charges in both the US and South Korea. Despite this, he was released from a Montenegro prison on Saturday, pending review by the country’s Supreme Court of earlier decisions regarding his extradition to South Korea.
Unusual Trial Dynamics in Kwon’s Legal Case
Do Kwon’s involvement in the Montenegro justice system has led to an unusual trial scenario for SEC enforcers. Typically, civil suits by regulators are postponed to prioritize criminal prosecutions. However, Kwon’s absence in the US complicates matters, as a criminal trial cannot proceed until he is present.
The SEC is seeking a court order to prevent Terraform and Kwon from violating US securities laws in the future. Additionally, they aim to impose civil penalties and reclaim alleged ill-gotten gains. The SEC alleges that Terraform and Kwon defrauded investors by falsely claiming that the popular Korean payment app, Chai, utilized Terraform’s blockchain technology for processing cryptocurrency transactions. They also purportedly misled investors about the stability of TerraUSD, claiming it was algorithmically “pegged” to the US dollar.
Terraform has refuted these allegations and criticized the SEC’s approach, accusing them of overly aggressive tactics against cryptocurrency companies.
In January, Terraform filed for Chapter 11 bankruptcy protection, citing an inability to pay the penalties sought by federal regulators. Kwon, who owns approximately 92% of the company’s equity, is deeply intertwined with the company’s financial situation.
Legal Developments Surrounding Kwon’s Trial
US District Judge Jed Rakoff, overseeing the civil trial, ruled in December that Terraform is liable for selling unregistered securities, siding with the SEC on a crucial aspect of the case. This ruling removes certain issues from the jury’s consideration. Terraform contends that its cryptocurrencies are not securities under the law and disputes the SEC’s jurisdiction, intending to appeal the decision.
Kwon was arrested in Montenegro a year ago while attempting to board a private jet to Dubai. He was convicted of using a fake passport and sentenced to four months in prison. Currently, he awaits a decision on his extradition location, with his team advocating for South Korea, where penalties for white-collar crimes are typically less severe than in the US. In January, Rakoff postponed the trial for two months at Kwon’s request, hoping his extradition would occur in time for him to participate. However, Montenegro’s prolonged legal process appears to have dashed this possibility.
During the trial, the jury is expected to hear about the involvement of Jump Trading, a Chicago-based trading firm, which the SEC alleges secretly collaborated with Terraform to support TerraUSD a year before its collapse. The SEC plans to present text messages exchanged between two Terraform executives discussing a “depeg” incident in May 2021, during which TerraUSD lost its peg to the dollar.
Key Witnesses and Details of the Terraform Trial
Text Message Exchange: According to court documents, Brian Curran, Terraform’s head of communications, allegedly messaged Jeffrey Kuan, the company’s business development head, stating that Do Kwon remarked, “if Jump hadn’t stepped in we actually might’ve been f—ed lol.” Kuan responded, “yeah i know they saved our a—.”
Expected Testimony: The SEC plans to present testimony from two alleged whistleblowers, including a Jump executive and the chief product officer at the Chai payment app, to support claims that Terraform and Kwon intentionally misled investors. Jump co-founder Bill DiSomma is also expected to testify. It’s noteworthy that Jump has not been accused of wrongdoing in the case.
Additional Witnesses: Other anticipated witnesses include Wintermute Trading Ltd. CEO Evgeny Gaevoy and COO Marina Gurevich. Terraform alleges that Wintermute’s shorting of UST in May 2022 contributed to a second and fatal depeg incident.
Trial Proceedings: The trial, expected to last at least two weeks, will coincide with FTX’s Bankman-Fried’s criminal sentencing hearing on Thursday. Prosecutors have requested a sentence of up to 50 years for Bankman-Fried, while his team is seeking 6 1/2 years.
Case Details: The Terraform case is identified as US v. Terraform Labs, 23-cv-01346, in the US District Court for the Southern District of New York (Manhattan).
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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