The Securities and Exchange Commission charged Terra founder Do Kwon and his company Terraform Labs with defrauding investors in “a multibillion-dollar scheme,” the regulator announced Thursday.
A lawsuit filed in the U.S. District Court for the Southern District of New York charges Kwon and Terraform with violating the registration and anti-fraud provisions of the Securities Act and the Exchange Act.
The SEC alleges that, from April 2018 to May 2022, Kwon and his company raised billions of dollars by offering and selling a suite of crypto assets including mAssets, which were security-based swaps designed to pay returns by mirroring the price of some U.S. companies’ stocks; Terra, a stablecoin designed to have a stable price pegged to the U.S. dollar; and Luna, a coin interconnected with the value of Terra.
Terra depegged from the U.S. dollar in May 2022, destabilizing the crypto market and causing widespread losses. Terra’s value plummeted to near zero. Today, Terra is valued at $0.000168. Just one month before the crash, it hit an all-time high of $119.18.
Kwon and Terraform repeatedly touted Terra as “yield-bearing” and told investors it would pay as much as 20% interest, according to the SEC.
The SEC also alleges Kwon and Terraform misled investors that a popular Korean mobile payment app used the Terra blockchain to settle transactions that would accrue value to Luna.
"We allege that Terraform and Do Kwon failed to provide the public with full, fair and truthful disclosure as required for a host of crypto asset securities, most notably for LUNA and Terra USD," SEC Chair Gary Gensler said. "We also allege that they committed fraud by repeating false and misleading statements to build trust before causing devastating losses for investors."
Regulators like the SEC have had a steadier focus on crypto, including stablecoins, since Terra’s collapse. Their focus has sharpened since the collapse of FTX, which, like Terra’s downfall, resulted in bankruptcies and financial challenges for exposed companies.
The SEC charged Genesis and crypto exchange Gemini last month with illegally selling securities to investors through their joint Gemini Earn crypto lending program.
The SEC also plans to sue crypto firm Paxos Trust Co. for violating investor protection laws, The Wall Street Journal reported Sunday. The New York Department of Financial Services ordered Paxos on Monday to stop issuing new Binance USD stablecoins.
Kwon, meanwhile, has been on the lam since Terra’s collapse last spring. Kwon is from South Korea, and Cointelegraph reported last week that South Korean officials have traveled to Serbia to find him. There is no extradition treaty between South Korea and Serbia, according to the report.
"I commend the SEC’s hard-working staff who remained vigilant in such an important investigation, even when the defendants attempted to prevent us from obtaining important information about their business," Gensler said of the Terraform suit. "This case demonstrates the lengths to which some crypto firms will go to avoid complying with the securities laws, but it also demonstrates the strength and commitment of the SEC’s dedicated public servants."
