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.
- Sources have said that the U.S. SEC was about to propose a rule change that would make it harder for crypto firms to become “qualified custodians”.
- If finalized, the rule change will affect many hedge funds, private equity firms, and pension funds that work with crypto firms, as most are required to use qualified custodians.
United States Securities and Exchange Commission building in Washington DC on January 13, 2018. Kristi Blokhin/Shutterstock
- Paxos confirmed it had received a Wells Notice from the U.S. SEC on 3 February, that claimed BUSD was an unregistered security.
- The company said it “categorically disagrees” with the SEC’s claim, and that it was prepared to “vigorously litigate if necessary”.
- The U.S. SEC alleged that Genesis and Gemini sold unregistered securities to retail investors through the exchange’s Earn program.
- Gemini co-founder Tyler Winklevoss fired back at the charges, calling the SEC’s actions “counterproductive” and optimized for “political points”.