A New York jury has determined that Terraform Labs and its founder, Do Kwon, are liable for civil fraud charges, siding with the U.S. Securities and Exchange Commission (SEC) on Friday, according to a Reuters report.
The SEC alleged that Terraform Labs and Kwon misled investors about the stability of their stablecoin, TerraUSD, and made other unsubstantiated claims. The failure of Terra led to $40 billion in losses and was flagged as a key trigger in a broader collapse of the crypto market.
Following a two-week trial, the verdict was delivered in federal court shortly after closing arguments were delivered, Reuters notes. The SEC is seeking civil financial penalties and orders barring Kwon and Terraform from the securities industry. The collapse of TerraUSD and its linked token, Luna, in May 2022 led to losses estimated at more than $40 billion and caused widespread turmoil in the cryptocurrency market.
Kwon, who was arrested in Montenegro in March 2023, did not attend the trial. Both the U.S. and South Korea have sought his extradition on criminal charges. Terraform Labs filed for bankruptcy protection in January.
The SEC argued that Kwon and Terraform secretly arranged for a third party to purchase large amounts of TerraUSD to maintain its peg to the dollar in May 2021, and Kwon falsely attributed the recovery to the reliability of TerraUSD's algorithms. The regulator also claimed that Kwon and Terraform falsely promoted the use of their blockchain in Chai, a popular payment app in Korea.
Attorneys for Terraform Labs and Kwon maintained that the company had been truthful about its products and their functionalities, even when they failed, and that the SEC's case relied on statements taken out of context.
The firm's legal representation was the subject of an earlier tussle with the regulator, with the SEC calling out a $166 million “slush fund” for its lawyers. Those lawyers fired back, calling the SEC's actions a “troubling example of government overreach” that it says intended to “disadvantage and distract” them from the merits of the case.
In December, one of the key questions hanging over the case was settled when a federal judge ruled that Luna and UST were indeed securities subject to registration and other financial regulations.