SEC files lawsuit against Terraform Labs and Do Kwon alleging fraud

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Key Takeaways

  • SEC alleges that Terraform and its founder Kwon marketed crypto asset securities to investors looking to earn a profit, claiming that the tokens would increase in value.
  • SEC has charged Terraform and Do Kwon with selling unregistered securities, selling unregistered security-based swaps, fraud
  • The agency accuses Terraform and Kwon of misleading investors about the stability of Terra’s stablecoin-UST

On Thursday, the United States Securities and Exchange Commission(SEC) filed a lawsuit against Terraform Labs(the company behind collapsed TerraUST stablecoin) and its founder, Do Kwon.

The regulatory watchdog has filed a complaint in the U.S. District Court for the Southern District of New York, charging Terraform and Kwon with selling unregistered securities, selling unregistered security-based swaps, and fraud, among other claims.

In its official statement, the SEC alleges that Terraform and Kwon offered and sold an “inter-connected suite of crypto asset securities, many in unregistered transactions.” The agency further accuses Terraform and Kwon of misleading investors about the stability of Terra’s stablecoin-UST.

“Terraform, and Kwon also misled investors about one of the most important aspects of Terraform’s offering – the stability of UST, the algorithmic ‘stablecoin’ purportedly pegged to the U.S. dollar,” the lawsuit reads.

UST lost its peg in May 2022, triggering the demise of Terra, which eventually created a ripple effect across the crypto market, forcing several firms to file for bankruptcy

The lawsuit accuses Terraform and its founder of working with an unnamed U.S. trading firm to restore UST’s peg after it fell nearly 10 cents in May. The suit claims that after the trading firm bought amounts of the UST token, it received LUNA tokens from Terraform.

“Terraform and Do Kwon emphasized the purported effectiveness of the algorithm underlying UST in maintaining UST pegged to the dollar – misleadingly omitting the true cause of UST’s re-peg: the deliberate intervention by the U.S. Trading company to restore the peg,” the suit said.

Commenting on the case, SEC chair Gary Gensler accuses Terraform and Do Kwon of failing to provide the public with “fair, full and truthful disclosure as required for a host of crypto asset securities, most notably for LUNA and Terra USD.”

“We also allege that they committed fraud by repeating false and misleading statements to build trust before causing devastating losses for investors,” he adds.

In the complaint, the regulatory body adds that Terraform and Kwon touted UST as a “yield-bearing” stablecoin, which they marketed as paying as much as 20% interest through the Anchor Protocol.”

Right after the collapse of the UST stablecoin, members of the SEC’s Division of Enforcement started probing whether investor protection rules were broken through the company’s marketing of the tokens. SEC has also probed Kwon in relation to his role in building the Mirror Protocol, which allows users to trade tokens representing synthetic stocks.

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Saniya Raahath
Saniya Raahath

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