The U.S. Securities and Exchange Commission (SEC) has sued Terraform Labs and its CEO Do Hyeong Kwon — better known as Do Kwon — for securities fraud involving the now-collapsed algorithmic stablecoin, TerraClassicUSD (USTC), and its sister token, Terra Luna Classic (LUNC).
SEC Charges Do Kwon And Terraform Labs
Terraform Labs, the company behind the fallen USTC algorithmic stablecoin, and its co-founder Do Kwon have been hit with a lawsuit from the SEC for allegedly “orchestrating a multi-billion dollar crypto asset securities fraud,” per the 55-page legal complaint filed in the U.S. District Court for the Southern District of New York.
The lawsuit argues that Kwon and Terraform Labs offered and sold an “inter-connected suite of crypto asset securities, many in unregistered transactions.”
Today we charged Singapore-based Terraform Labs PTE Ltd and Do Hyeong Kwon with orchestrating a multi-billion-dollar crypto asset securities fraud involving an algorithmic stablecoin and other crypto asset securities.
— U.S. Securities and Exchange Commission (@SECGov) February 16, 2023
The agency also alleged the two misled investors about the stability of the Terra network stablecoin.
“Terraform and Kwon also misled investors about one of the most important aspects of Terraform’s offering — the stability of UST, the algorithmic ‘stablecoin’ purportedly pegged to the U.S. dollar. UST’s price falling below its $1.00 ‘peg’ and not quickly being restored by the algorithm would spell doom for the entire Terraform ecosystem, given that UST and LUNA had no reserve of assets or any other backing.”
According to the SEC, Terraform and Kwon liaised with an unnamed U.S.-based trading company to help the stablecoin regain its intended parity with the dollar after it dropped to 10 cents back in May 2021. After the said company purchased amounts of USTC, it received Terra’s non-stablecoin asset, LUNC, from Terraform.
In a press release, SEC boss Gary Gensler notes that Kwon and Terraform Labs “failed to provide the public with full, fair, and truthful disclosure”, particularly for USTC and LUNC. Gensler further said:
“We also allege that they committed fraud by repeating false and misleading statements to build trust before causing devastating losses for investors.”
Terra’s ecosystem crumpled in early May 2021 when USTC de-pegged and flew into a death spiral, directly wiping out over $42 billion in investor wealth in the span of days. During the meltdown, Kwon, the crypto project’s charismatic figurehead, stated he’d deploy Luna Guard Foundation’s Bitcoin reserves to stop the stablecoin from spiraling.
The SEC notes that Kwon failed to reveal the real reason the algorithmic stablecoin re-pegged was due to the “deliberate intervention by the U.S. Trading Firm to restore the peg”.
Lawsuit Is One Of Many
Though the mantle of Public Enemy Number One has passed onto FTX’s Sam Bankman-Fried, Do Kwon engineered the man-made disaster that precipitated the bitter crypto winter in May.
As such, today’s newly-publicized SEC lawsuit is not the only case against the Terra project and its leader. Last year, a U.S. District Court judge ordered Terraform and Do Kwon to comply with subpoenas the SEC issued in its investigation of Terra’s Mirror Protocol — a decentralized finance (DeFi) platform that allowed users to create and trade “mirrored assets,” or mAssets, that “mirror” the stock price of publicly-listed companies.
Kwon also faces criminal charges in his native home South Korea. In late September, Interpol issued a red notice against him in an attempt to restrict Kwon’s movement internationally. Kwon was stripped of his passport and constantly denied being on the run from authorities. Earlier this month, South Korean officials reportedly confirmed they sent at least two people to track him down in Serbia, where he has supposedly been living since leaving Singapore sometime in September.