Terraform Labs and its co-founder, Do Kwon, have been found guilty of defrauding investors in a civil case with the United States Securities and Exchange Commission (SEC). The verdict was reached by a jury in the U.S. District Court for the Southern District of New York after a brief deliberation. Kwon did not attend the trial as he remains in Montenegro, awaiting a decision on an extradition request from the U.S. or South Korea.
Gurbir Grewal, the SEC’s Enforcement Director, expressed satisfaction with the verdict, stating that it held Terraform Labs and Kwon accountable for a significant crypto fraud. Grewal accused the company and its former CEO of deceiving investors about the stability of the crypto asset security, Terra USD, as well as misleading them about the use of Terraform’s blockchain for payment processing.
Grewal emphasized the consequences of Terraform’s failure to register with the regulator, calling for compliance. During the trial, SEC attorneys likened the platform to a precarious structure and accused the company and Kwon of lying to investors.
In response to the verdict, a spokesperson for Terraform Labs expressed disappointment and contested its validity, stating that they believe the evidence does not support it. The spokesperson also argued that the SEC lacks the legal authority to bring the case and said they are carefully considering their options and next steps.
According to the verdict filed in the U.S. District Court for the Southern District of New York, Kwon and Terraform were found liable for six charges. The jury also determined that the platform acted recklessly by making false or misleading statements about the offering or sale of TerraUSD, Luna, and wLUNA.
Terraform Labs experienced a collapse in May 2022 due to the instability of its algorithmic stablecoin, UST, and other issues related to the blockchain’s use cases. This collapse had a significant impact on the crypto market and led to bankruptcy filings from several firms, including FTX, BlockFi, and Celsius.
The SEC filed its lawsuit against Terraform and Kwon in February 2023, alleging a multi-billion dollar crypto asset securities fraud orchestrated by the two. The outcome of this civil case could have far-reaching consequences for crypto firms operating in the U.S. In December, Judge Jed Rakoff ruled in favor of Terraform regarding the unregistered offer and sale of security-based swaps.
It is unclear how the verdict will affect Kwon’s extradition from Montenegro. Following a decision by the country’s Supreme Court, his case has been sent back to a lower court to determine whether extradition to the U.S. or South Korea will be granted. Kwon is facing criminal charges in both countries.
The proposed crypto regulations in the U.S. are driven by fear and doubt among lawmakers, further highlighting the potential impact of cases like Terraform’s on the regulatory landscape.