A Manhattan jury on Friday found a Singapore-based former crypto CEO liable for civil fraud, agreeing with the U.S. Securities and Exchange Commission that both he and his company misled investors before the collapse of the eponymous cryptocurrency markets. the company in 2022.
The jury handed down the verdict in federal court after a two-week trial after hearing closing arguments earlier in the day. Terraform Labs founder Do Kwon was not present at the trial as he has been detained in Montenegro since March 2023. He was intercepted on his way to Dubai while fleeing authorities in multiple countries, traveling with forged Costa Rican travel documents.
The SEC accused both Terraform and Kwon of misleading investors in 2021 about the stability of TerraUSD, a stablecoin designed to maintain a value of $1. The regulator also alleged that both falsely claimed that Terraform’s blockchain was used in a popular Korean mobile payment app. The regulator is seeking civil financial penalties and orders to ban Kwon and Terraform from entering the securities industry.
SEC attorney Laura Meehan said during closing arguments that the platform’s success story was “built on lies.”
“When you go big and miss, and you don’t tell people you came up short. That is fraud,” Meehan said.
Louis Pellegrino, a lawyer for Terraform, told the jury Friday that the SEC’s case was based on statements taken out of context and that Terraform and Kwon had been honest about their products and how they worked, even when they failed.
“Terraform is still here trying to rebuild and heal the buyers,” he said.
Kwon, who was arrested in Montenegro in March 2023, did not attend the trial, which started on March 25. Both the US and South Korea, where Kwon is a citizen, have sought his extradition under criminal law.
Montenegro’s highest court is evaluating competing calls for his extradition. Kwon’s lawyers have argued for extradition to South Korea in the hope of a lighter sentence. However, the government of Montenegro plans to approve the extradition to the US. Bloomberg reported.
Kwon designed the cryptocurrencies TerraUSD and Luna, a more traditional token that fluctuated in value but was closely tied to TerraUSD.
The SEC estimates that investors lost more than $40 billion on the two tokens combined when the TerraUSD peg to the dollar could not be maintained in May 2022.
Their collapse has also dragged down the value of other cryptocurrencies, including bitcoin, and caused greater devastation to the crypto market, causing several companies to file for bankruptcy in 2022.
Terraform itself filed for bankruptcy protection in January.
The SEC has said that Kwon and Terraform secretly arranged to have a third party buy large amounts of TerraUSD to prop up the price when the stablecoin slipped from its peg a year earlier in May 2021. Kwon incorrectly attributed the recovery to the reliability of TerraUSD’s algorithms, the regulator said.
Terraform’s attorney said Friday that Terraform had disclosed that TerraUSD’s link had to be defended in May 2021. He said the Korean payments app had used the company’s blockchain, but the technical details of how it did so were not important to investors.
US financial regulators have been keen to crack down on shady crypto tycoons in recent months. Ex-FTX CEO Sam Bankman-Fried was sentenced late last week to 25 years in prison for bank fraud and conspiracy to commit money laundering. His company is still in the middle of controversial bankruptcy proceedings.
Gurbir Grewal, director of the SEC’s Enforcement Division, said in a statement Friday: “The defendants caused devastating losses for investors and wiped out tens of billions in market value almost overnight. For all the promise of crypto, the lack of registration and compliance has very real consequences for real people. As our team’s hard work shows, we will continue to use the tools at our disposal to protect the investing public, but it is high time that the crypto markets respond.”