CEO at the center of 2022 crypto crash found liable for fraud

A jury determined that Do Kwon and Terraform Labs deceived investors prior to the collapse of the company’s cryptocurrency

A Manhattan jury found a former crypto CEO based in Singapore liable for civil fraud charges on Friday. The jury sided with the US Securities and Exchange Commission, concluding that both the CEO and his company misled investors before the collapse of their cryptocurrency in 2022, which caused turmoil in cryptocurrency markets.

The jury reached this decision in federal court after a two-week trial and hearing closing arguments earlier in the day. The founder of Terraform Labs, Do Kwon, was not present at the trial as he has been detained in Montenegro since March 2023. He was apprehended while attempting to flee to Dubai, using forged Costa Rican travel documents, to evade authorities in several countries.

The SEC accused Terraform and Kwon of deceiving investors in 2021 regarding the stability of TerraUSD, a stablecoin intended to maintain a value of $1. The regulator also claimed that both parties falsely asserted that Terraform’s blockchain was utilized in a popular Korean mobile payment application. The SEC is seeking civil monetary penalties and injunctions preventing Kwon and Terraform from participating in the securities industry.

During closing arguments, Laura Meehan, the SEC attorney, stated that the platform’s success story was “built on lies.”

“If you take a big swing and miss, and you fail to disclose that you missed, that is fraud,” Meehan remarked.

Louis Pellegrino, an attorney representing Terraform, informed the jury on Friday that the SEC’s case relied on statements that were taken out of context. He argued that Terraform and Kwon had been truthful about their products and their functionality, even in instances of failure.

Following the verdict, the company released a statement expressing disappointment: “We are very disappointed with the verdict, which we do not believe is supported by the evidence. We continue to maintain that the SEC does not have the legal authority to bring this case at all, and we are carefully weighing our options and next steps.”

Kwon, who was arrested in Montenegro in March 2023, did not attend the trial, which commenced on March 25. Both the US and South Korea, Kwon’s home country, have requested his extradition on criminal charges.

Montenegro’s highest court is currently reviewing the extradition requests. Kwon’s legal team has advocated for extradition to South Korea, hoping for a more lenient sentence. However, Montenegro’s government is reportedly inclined to approve extradition to the US, according to Bloomberg.

Kwon created the cryptocurrencies TerraUSD and Luna. Luna, a more conventional token, had a fluctuating value but was closely tied to TerraUSD.

The SEC calculates that investors lost over $40 billion in total on these two tokens when the peg of TerraUSD to the dollar could not be sustained in May 2022.

The decline in value of these tokens also impacted other cryptocurrencies, such as bitcoin, and resulted in broader turmoil in the crypto market. This turmoil led several companies to declare bankruptcy in 2022.

Terraform itself filed for bankruptcy protection in January.

The SEC alleges that Kwon and Terraform covertly arranged for a third party to buy significant amounts of TerraUSD to support the price when the stablecoin deviated from its peg in May 2021. According to the regulator, Kwon falsely credited the stability of TerraUSD’s algorithms for the recovery.

Terraform’s attorney stated on Friday that Terraform had disclosed the need to defend TerraUSD’s peg in May 2021. He mentioned that the Korean payments app had utilized the company’s blockchain, but the specific technicalities were not material to investors.

US financial regulators have intensified efforts to crackdown on dubious cryptocurrency figures in recent months. Former FTX CEO Sam Bankman-Fried was recently sentenced to 25 years in federal prison for wire fraud and conspiracy to launder money. His company is currently embroiled in contentious bankruptcy proceedings.

In a statement on Friday, Gurbir Grewal, director of the SEC’s division of enforcement, remarked, “The defendants inflicted severe losses on investors and rapidly erased tens of billions of market value. Despite all the promises of cryptocurrency, the absence of registration and compliance has tangible consequences for individuals. As demonstrated by the diligent efforts of our team, we will persist in utilizing our resources to safeguard investors. However, it is imperative for the crypto markets to align with regulatory standards.”