SEC seeks summary judgment against Terraform Labs
The Securities and Exchange Commission (SEC) has filed a motion for summary judgment on all of its claims against Terraform Labs Pte Ltd. and Do Hyeong Kwon.
The motion, seen by FX News Group, was submitted on November 2, 2023 at the New York Southern District Court.
Terraform and Kwon orchestrated a fraudulent scheme that ultimately led to $45 billion in market loss, including devastating losses for U.S. investors. Defendants fabricated Terra blockchain activity to create the appearance of real world transactions on the blockchain that did not exist. And they lied to investors about the stability of Terraform’s so-called stablecoin, while concealing the secret deal Defendants had entered into with a third party to save the asset from collapse.
When this scheme unraveled, investors in Terraform’s crypto asset securities lost nearly everything.
Starting in 2018, Defendants offered and sold an array of crypto asset securities, aggressively marketing them to the public as profitable investments. Defendants created and touted a purportedly “principal protected” and “yield-bearing” protocol, dubbed the Anchor Protocol, which promised to pay 19-20% interest on Terraform’ s so-called stablecoin TerraUSD (“UST”).
UST was purportedly pegged at $1 based on an algorithm tying UST to another one of Defendants’ crypto asset securities, the LUNA token, which Defendants called the “equity” of the Terra ecosystem. Defendants promised investors that LUNA’s value would appreciate the more the Terra blockchain was used, and repeatedly touted the managerial and entrepreneurial efforts they would and did undertake to accomplish that goal.
Kwon and Terraform then engaged in a scheme to defraud the public about use and stability of these crypto asset securities.
First, Defendants told investors that a popular Korean online payment platform called Chai, was using the Terra blockchain to process merchant transactions, when it was not. To further deceive investors, Defendants replicated the Chai payments on the Terra blockchain in millions of what Kwon internally referred to as “fake transactions” using wallets and stablecoins that Defendants owned and controlled.
Second, Defendants also represented to the public that each UST token was safely and automatically pegged to the U.S. Dollar via a blockchain algorithm linking it with LUNA. In May 2021, when UST slipped below and then returned to its $1 peg, Kwon told investors that UST had “automatically self-healed” due to the ingenuity of Defendants’ algorithm, which had, according to Terraform, prevailed over the “decision-making of human agents.”
In reality, there was no automatic self-healing. Defendants had struck a secret side-deal with a third party to push UST back up to $1, in exchange for selling that party LUNA at dramatically reduced prices.
In addition to defrauding investors, Defendants engaged in unregistered public offerings of certain of their crypto asset securities. Defendants distributed LUNA and MIR to intermediaries that were expected to, and did, resell those securities into public trading markets accessible to investors in the U.S. Defendants also directly offered and sold LUNA and MIR to investors through public trading public markets accessible to U.S. investors.
Defendants did not register any of these offers or sales of their crypto asset securities with the SEC.
The Court should grant summary judgment in the SEC’s favor, the regulator concludes.