Lawyers representing the United States Securities and Exchange Commission (SEC) began the civil trial against Terraform Labs by painting a damning picture of the company as a fraudulent empire that caused investors to suffer significant losses. During the trial’s first day in the U.S. District Court for the Southern District of New York on March 25, SEC attorney Devon Staren described Terra as a “house of cards” that crumbled in 2022, leaving investors devastated. The trial comes more than a year after the SEC filed a lawsuit against the blockchain firm in February 2023, accusing Terra and its co-founder Do Kwon of orchestrating a multi-billion dollar cryptocurrency securities fraud.
Kwon was notably absent from the trial’s opening day as he had been arrested in Montenegro in March 2023 for using forged travel documents. He was subsequently sentenced to four months in prison. Although he was reportedly released on March 23, awaiting extradition either to the United States or his home country of South Korea, no decision had been made regarding his extradition at the time of this article’s publication.
The SEC claims that Terra and Kwon deceived investors about the stability of TerraUSD (UST), an algorithm-based stablecoin that became unpegged from the U.S. dollar. The impact of this instability on Terra (LUNA) and other tokens likely contributed to a significant downturn in the cryptocurrency market in 2022, leading to several companies declaring bankruptcy.
Originally scheduled to begin in January, the trial’s start date was postponed to March after the SEC and Kwon’s legal team sought additional time to allow the Terraform Labs co-founder to participate in his defense in person. In December 2023, Judge Jed Rakoff granted summary judgment in favor of the SEC regarding Terra’s involvement with unregistered securities, while ruling in favor of Kwon and the platform for the offer and sale of security-based swaps.
Terraform’s trial is just one among many expected crypto-related court cases in 2024. On March 28, former FTX CEO Sam Bankman-Fried is set to be sentenced following his conviction on seven felony charges. Additionally, former Binance CEO Changpeng Zhao, who pleaded guilty to one felony charge, is expected to be sentenced on April 30.
The increased focus of U.S. enforcement agencies on cryptocurrency-related crime is becoming evident, as this trial and others highlight the efforts being made to crack down on illicit activities within the crypto space.