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SEC charges Do Kwon and Terraform with “multi-billion dollar” securities fraud

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(Kitco News) - The U.S. Securities and Exchange Commission (SEC) wrapped up one of its busiest two-week stretches in years on Friday by charging Terraform Labs and its fugitive CEO Do Kwon with securities fraud.

The SEC wrote in an announcement that Kwon and Terraform orchestrated “a multi-billion dollar crypto asset securities fraud involving an algorithmic stablecoin and other crypto asset securities.”

According to the SEC’s complaint, between April 2018 and May 2022, Kwon and his firm “raised billions of dollars from investors by offering and selling an inter-connected suite of crypto asset securities, many in unregistered transactions.” These included so-called ‘mAssets’ that mirrored the price of U.S. stocks, and Terra USD (UST), the algorithmic stablecoin pegged to the U.S. dollar and “interchangeable for another of the defendants’ crypto asset securities, LUNA.”

The SEC said Terraform and Kwon “touted and marketed UST as a ‘yield-bearing’ stablecoin, which they advertised as paying as much as 20 percent interest through the Anchor Protocol,” and that they “repeatedly misled and deceived investors that a popular Korean mobile payment application used the Terra blockchain to settle transactions that would accrue value to LUNA.”

The complaint also alleges that Kwon and others at Terraform “misled investors about UST’s stability before it ultimately depegged from the U.S. dollar and became nearly worthless.

"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," SEC Chair Gary Gensler said. "We also allege that they committed fraud by repeating false and misleading statements to build trust before causing devastating losses for investors."

The complaint was filed in the U.S. District Court for the Southern District of New York, and it charges the defendants with violating the registration and anti-fraud provisions of the Securities Act and the Exchange Act.

“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,” said SEC Enforcement Division Director Gurbir Grewal. “Today’s action not only holds the defendants accountable for their roles in Terra’s collapse [...] but once again highlights that we look to the economic realities of an offering, not the labels put on it.”

The SEC charge sheet filed with the complaint provides more detail about Terraform’s secret scheme to prop up UST.

“In May 2021, UST dropped below $1.00,” they wrote. “In response, defendants secretly discussed with a third party that the third party would purchase massive amounts of UST to restore the $1.00 peg.”

Once UST had returned to its $1.00 peg, Kwon and his company “publicly and repeatedly” touted this as “a triumph of decentralization” and the “automatically self-heal[ing] UST/LUNA algorithm over the “decision-making of human agents in time of market volatility,” while concealing the fact that it was humans deciding “to prop up UST's price” that actually repegged the token. This convinced investors to buy billions more in Luna and UST, further enriching Kwon and Terraform.

The complaint does not name the third party who conspired to restore the UST peg, but The Block on Friday identified them as Jump Trading, and the SEC filing indicates they made $1.3 billion through their dealings with Terraform.

“One year later, in May 2022, under selling pressure from large UST holders, UST depegged from the US dollar again,” they wrote. “This time, without secret intervention to save it, the price of UST and LUNA plummeted to nearly zero bringing down with them the other crypto assets securities in the interconnected Terraform ecosystem, wiping out over $40 billion of total market value in these assets and sending shockwaves through the crypto asset community.”

Do Kwon has been on the run from South Korean law enforcement since the implosion of Terraform, with Bloomberg reporting last week that officials from Kwon’s home country traveled to Serbia to attempt to locate him.

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