The Securities and Exchange Commission has filed a suit against Terraform Labs and its creator, Do Kwon, for allegedly “orchestrating a multi-billion dollar crypto asset securities fraud.”
In a statement on February 16, the SEC said that Kwon and Terraform promoted and sold an interconnected suite of crypto asset securities, many of which were traded in unregistered transactions. The agency referenced the defunct algorithmic stablecoin from Terraform Labs, TerraClassicUSD, and its associated cryptocurrency, Terra Luna Classic.
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 SEC also objected to mAssets, which are crypto derivatives that mimic the stock price of publicly traded firms, and Terraform issuance of Mirror (MIR), a governance token for the Mirror protocol that lists mAssets.
Gary Gensler, chairman of the Securities and Exchange Commission, said that Kwon and Terraform failed to provide the public with complete, fair, and trustworthy information, notably for USTC and LUNC, previously known as Terra and TerraUSD. Gensler added:
“We also allege that they committed fraud by repeating false and misleading statements to build trust before causing devastating losses for investors.”
The SEC filed a 55-page lawsuit in the U.S. District Court for the Southern District of New York alleging breaches of the anti-fraud provisions of the Securities Act and Exchange Act.
The SEC said that Terraform and Kwon promoted and marketed its Anchor Protocol, which at one time was billed as paying 20% interest on USTC deposits. Besides, Terraform and Kwon were claimed to have deceived investors on the reliability of Terra’s stablecoin.
In May, USTC lost its peg to the U.S. dollar, causing its price and the price of LUNC to plummet to zero. This culminated in a more significant collapse of the market for digital assets, which wiped away an estimated $40 billion in value.
Gensler praised the SEC staff’s probe, noting, “The defendants attempted to prevent us from obtaining important information about their business.”
“This case demonstrates the lengths some crypto firms will go to avoid complying with the securities laws,” he added.
Kwon, a citizen of South Korea, is now at large and presumed to be in Serbia, having fled his home in Singapore in September after a Seoul court issued an arrest order for him. Later in September, Interpol allegedly issued a Red Notice for Kwon to law enforcement agencies throughout the globe.
Kwon has denied fleeing from police, and Terraform has said that the prosecution against Kwon in South Korea is “highly politicised.”