Terraform Labs and its co-founder, Do Kwon, have been found guilty of defrauding investors in a civil case brought by 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, who is currently in Montenegro, did not attend the SEC trial as the courts decide on an extradition request from the U.S. or South Korea.
SEC Enforcement Director Gurbir Grewal expressed satisfaction with the jury’s decision, stating that Terraform Labs and Kwon had engaged in a significant cryptocurrency fraud. According to Grewal, the company and its former CEO deceived investors about the security and stability of the crypto asset Terra USD and misled them regarding the use of Terraform’s blockchain in a popular payment application.
Grewal emphasized the consequences of Terraform’s lack of registration with the SEC, reiterating the need 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, asserting that it was not supported by the evidence. The spokesperson maintained that the SEC did not have the legal authority to bring the case and stated that the company was considering its options and next steps.
According to the verdict, Kwon and Terraform were found liable for six charges related to false or misleading statements about the sale of TerraUSD (UST), Luna (LUNA), and wLUNA.
Terraform Labs collapsed in May 2022 due to the instability of its algorithmic stablecoin, UST, and other issues related to the blockchain’s use cases. The platform’s failure had a significant impact on the crypto market, leading to bankruptcy filings from several firms, including FTX, BlockFi, and Celsius.
The SEC filed its lawsuit against Terra and Kwon in February 2023, alleging a multi-billion dollar crypto asset securities fraud. The outcome of the civil case could have far-reaching implications for crypto firms operating in the U.S. In a separate ruling in December, Judge Jed Rakoff ruled in favor of Terraform regarding the unregistered offer and sale of security-based swaps.
The verdict’s impact on Kwon’s extradition from Montenegro remains uncertain. His case has been returned to a lower court to determine whether extradition to the U.S. or South Korea will be granted. He is facing criminal charges in both countries.
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