SEC Charges Do Kwon and Terraform Labs With Fraud
- The U.S. securities regulator said that Kwon and Terraform offered and sold an “inter-connected suite of crypto asset securities, many in unregistered transactions”.
- The SEC also alleged that investors were misled about the stability of Terra’s algorithmic stablecoin in 2021, when its peg was restored by “human agents”.
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The U.S. Securities and Exchange Commission (SEC) filed a lawsuit against Terraform Labs and its co-founder Do Kwon for orchestrating a multi-billion dollar crypto securities fraud, the regulator said in a press release on 16 February.
According to the announcement, the SEC has charged both Terraform and Kwon with fraud, selling unregistered securities, selling unregistered security-based swaps, and other similar crimes. The regulator further claimed the company and its co-founder offered and sold an “inter-connected suite of crypto asset securities, many in unregistered transactions”, referring to the algorithmic stablecoin Terra USD and the Terra Luna token. SEC Chair Gary Gensler said in a statement:
“We allege that Terraform and Do Kwon failed to provide the public with full, fair, and truthful disclosure as required for a host of crypto asset securities, most notably for LUNA and Terra USD. We also allege that they committed fraud by repeating false and misleading statements to build trust before causing devastating losses for investors.”
The regulator also took issue with the company’s mAssets — crypto derivatives designed to mirror the price of publicly listed companies — as they were a security-based swaps designed to pay returns.
The SEC lawsuit noted that one of the biggest offences was that Terraform and Kwon misled investors about the stability of the Terra USD stablecoin, especially in May 2021 when the token lost its peg and fell by nearly 10 cents. Once the stablecoin recovered, Kwon and Terraform ephasized the “purported effectiveness of the algorithm”, when in fact the company had “secretly discussed plans” with an unnamed U.S. trading firm to buy “large amounts” of the stablecoin to restore its USD peg.
An arrest warrent for Do Kwon and six other individuals was issued by a Seoul court back in September 2022, but Terra’s co-founder is still at large. Authorities in South Korea believe that Do Kwon escaped to Serbia after his short visit to Dubai in October 2022.
- Blockchain network Terra said its website was compromised by hackers over the weekend, and warned users against ongoing phishing scams.
- The platform later froze its website to prevent the hackers from exploiting it, and reminded users to avoid websites with the terra.money domain for now.
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- During an interview with FT, CEO Brian Armstrong said that before the lawsuit a SEC staff member had said that all crypto except BTC was security, and should be delisted.
- When asked how he came to that conclusion, the SEC staff member reportedly said “we’re not going to explain it to you, you need to delist every asset other that Bitcoin”.
- A federal judge ruled that the sale of XRP through exchanges and algorithms did not qualify as selling securities, which could have a major impact on several SEC lawsuits.
- The institutional sale of the token, however, did violate federal securities laws, and the lawsuit between the SEC and Ripple will have to go to trial.