Terraform Labs and founder Do Kwon found liable in US civil fraud trial

NEW YORK — A jury in Manhattan found Singapore-based Terraform Labs and its founder Do Kwon liable on civil fraud charges on April 5, agreeing with the US Securities and Exchange Commission that they misled investors before their stablecoin's 2022 collapse shocked cryptocurrency markets.

The jury delivered the verdict in federal court after a two-week trial after hearing closing arguments earlier in the day.

The SEC accused the company and Kwon of misleading investors in 2021 about the stability of TerraUSD, a stablecoin designed to maintain a value of US$1 (S$1.35).

The regulator also accused them of falsely claiming Terraform's blockchain was used in a popular Korean mobile payment app.

SEC attorney Laura Meehan said during closing arguments that the platform's success story was "built on lies."

"If you swing big and you miss, and you don't tell people that you came up short, that is fraud," Meehan said.

Louis Pellegrino, an attorney for Terraform, told the jury on April 5 the SEC's case relied on statements taken out of context and that Terraform and Kwon had been truthful about their products and how they worked, even when they failed.

"Terraform is still out there, trying to rebuild and make purchasers whole," he said.

The regulator is seeking civil financial penalties and orders barring Kwon and Terraform from the securities industry.

Kwon, who was arrested in Montenegro in March 2023, did not attend the trial, which began March 25. Both the US and South Korea, where Kwon is a citizen, have sought his extradition on criminal charges.

Kwon designed TerraUSD and Luna, a more traditional token that fluctuated in value but was closely linked to TerraUSD.

The SEC estimates investors lost more than US$40 billion on the two tokens combined when the TerraUSD peg to the dollar could not be maintained in May 2022.

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Their collapse also dragged down the value of other cryptocurrencies, including bitcoin, and caused wider havoc in the crypto market, leading several companies to file for bankruptcy in 2022.

Terraform itself filed for bankruptcy protection in January.

The SEC has said Kwon and Terraform secretly arranged to have a third party purchase large amounts of TerraUSD to prop up the price when the stablecoin slipped from its peg a year earlier, in May 2021.

Kwon falsely attributed the recovery to the reliability of TerraUSD's algorithms, according to the regulator.

The SEC also has said Kwon and Terraform falsely touted Terraform's blockchain as being used to process and settle transactions between customers and merchants on the Chai payment app.

Pellegrino said on April 5 that Terraform had disclosed TerraUSD's peg needed to be defended in May 2021.

He said Chai had used the company's blockchain, but the technical details of how it did so were not important to investors.

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