Terraform Labs and its founder Do Kwon built a “house on the sand” and lied to investors about the stability of cryptocurrencies whose collapse rippled through the market in 2022, a Securities and Exchange Commission lawyer says in a civil suit. He told a Manhattan jury as his fraud trial began. on monday.
The SEC accused Kwon and the Singapore-based blockchain company of misleading investors in 2021 about the stability of TerraUSD, a stablecoin designed to maintain the value of $1. . Regulators also accused Terraform of making false claims that its blockchain was used in a popular South Korean mobile payment app.
“Terra was a fraud, a castle in the sand, and when it collapsed, investors lost almost everything,” SEC attorney Devon Staren said at trial.
Terraform's lawyer Luis Pellegrino said the regulator's case relies on cherry-picked evidence and testimony from witnesses who expect the SEC to reward the whistleblower if it wins. .
Kwon's lawyer, David Patton, said the cryptocurrency entrepreneur never represented that Terra's cryptocurrency was risk-free.
“Failure is not the same as fraud,” Patton says.
Kwon will not attend the trial. He was arrested in Montenegro last March and is awaiting extradition to his native South Korea, where he faces criminal charges.
A court in Montenegro postponed his extradition on Friday after the country's prosecutors expressed concerns about the procedure.
Federal prosecutors in New York have also indicted Kwon on fraud charges and are seeking his extradition to the United States.
Kwon designed TerraUSD and Luna, a more traditional token that fluctuates in value but is closely related to TerraUSD.
The SEC estimates that when TerraUSD lost its dollar peg in May 2022, investors collectively lost more than $40 billion in the two tokens.
Their collapse also caused the value of other cryptocurrencies, including Bitcoin, to fall, causing widespread turmoil in the crypto market and leading to several companies filing for bankruptcy in 2022.
According to the SEC, when the stablecoin fell off its peg a year ago in May 2021, Kwon and Terraform secretly arranged for a third party to buy large amounts of TerraUSD to support the price. It is said that
The regulator said Kwon falsely claimed that the recovery was due to the reliability of TerraUSD's algorithm.
The SEC also alleges that Kwon and Terraform falsely promoted that Terraform's blockchain was used to process and settle transactions between customers and merchants on the Chai payment app.
Kwon and Terraform have denied any wrongdoing, and the SEC said it took statements by Kwon and other Terraform employees out of context.
The SEC is seeking civil penalties and an order barring Kwon and Terraform from the securities industry.
In December, U.S. District Judge Jed Rakoff granted a partial victory to the SEC, ruling that Terraform Labs illegally sold digital assets without registering them as securities.
The judge rejected the SEC's argument that Terraform and Kwon illegally offered security-based swaps through a feature that allowed users to create digital assets that mirrored the price of another asset, such as another cryptocurrency or a stock. .
A judge has not yet decided how much damages Terraform will have to pay, but the company, which filed for bankruptcy protection in January, said the penalties could exceed its assets.
