The U.S. Securities and Exchange Commission (SEC) has reportedly charged Terraform Labs (TFL) and its CEO Do Hyeong Kwon with investor fraud. Making the announcement, the U.S. SEC tweeted:
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 securities regulator, per court filings, charges TFL founder Do Kwon with orchestrating a multi-billion dollar crypto asset securities fraud involving an algorithmic stablecoin and other crypto asset securities.
Kwon reportedly raised billions of dollars from investors between April 2018 to May 2022 as he sold various interconnected digital assets. Many of these digital assets’ transactions were reportedly not having any securities registration, per the SEC’s Southern District of New York (SDNY) court filing.
Per the U.S. SEC’s complaint, these unregistered digital assets included mAssets and Terra USD or UST. mAssets are “security-based swaps designed to pay returns by mirroring the price of stocks of US companies.”
Terra USD or UST is “a crypto asset security referred to as an “algorithmic stablecoin” that supposedly maintained its peg to the U.S. dollar by being interchangeable for another of the defendants’ crypto asset securities, LUNA.”
Terraform and Kwon are also alleged by the SEC to have offered and sold investors other means to invest in their crypto empire, including the crypto asset security tokens MIR—or “mirror” tokens—and LUNA itself.
The SEC alleges that Do Kwon and Terraform marketed UST as a “yield-bearing” stablecoin. They fraudulently claimed UST would pay “as much as 20 percent interest through the Anchor Protocol.”
The LUNA token marketing involved Terraform and Kwon misleading and deceiving investors that a popular Korean mobile payment application used the Terra blockchain to settle transactions that would accrue value to LUNA.
The U.S. SEC Chairman Gary Gensler said, we allege that Terraform and Do Kwon failed to provide the public with full, fair, and truthful disclosure as required for a host of crypto asset securities, most notably for LUNA and Terra USD.
We also allege that they committed fraud by repeating false and misleading statements to build trust before causing devastating losses for investors.
Those charged are also alleged to have “misled investors about UST’s stability.” Notably, in “May 2022, UST depegged from the U.S. dollar,” with its price and that of its sister tokens’ went south close to zero.
Gurbir S. Grewal, Director, Division of Enforcement, SEC, said, “Today’s action not only holds the defendants accountable for their roles in Terra’s collapse, which devastated both retail and institutional investors and sent shock waves through the crypto markets, but once again highlights that we look to the economic realities of an offering, not the labels put on it.
As alleged in our complaint, the Terraform ecosystem was neither decentralized, nor finance. It was simply a fraud propped up by a so-called algorithmic “stablecoin” – the price of which was controlled by the defendants, not any code.”
Filed in the SDNY, the complaint charges Do Kwon and TFL with the Securities Act and the Exchange Act’s registration and anti-fraud provisions’ violation.
