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A New York jury found Terraform Labs and its co-founder Do Kwon liable for defrauding cryptocurrency investors in a scheme that triggered a $40 billion loss in market value.
The civil verdict, issued after a nine-day trial in federal court in Manhattan, is a victory for the U.S. Securities and Exchange Commission as the regulator unleashed a crackdown on the cryptocurrency sector. The SEC last year sued the collapsed stablecoin operator Kwon for allegedly raising billions of dollars from investors by selling several interconnected digital securities, many of which were not registered with regulators.
According to the SEC, these assets included TerraUSD, a stablecoin developed by Kwon whose sudden collapse in 2022 shook the cryptocurrency industry, as well as the associated luna token.
Terraform and Kwon “caused devastating losses for investors and wiped out tens of billions in market value almost overnight,” Gurbir Grewal, director of the SEC’s enforcement division, said Friday after the verdict.
They “misled investors about the security stability of cryptocurrencies and the so-called algorithmic stablecoin TerraUSD, and further misled investors about whether a popular payment application used the Terraform blockchain to process and settle payments,” he added.
Terraform said on Friday: “We are very disappointed by the verdict, which we do not believe is supported by the evidence. We continue to maintain that the SEC has absolutely no legal authority to prosecute this case and we are carefully evaluating our options and next steps.”
Agency President Gary Gensler has increased scrutiny of an industry he has called a “Wild West” full of noncompliance and misconduct. He argued that many digital tokens qualify as securities and fall under the jurisdiction of the SEC.
Grewal said: “For all the promise of cryptocurrencies, the lack of registration and compliance has very real consequences for real people.”
It also deals a new blow to Terraform and its South Korean CEO, who have faced legal challenges since the collapse of TerraUSD and luna, including criminal fraud charges.
Kwon, who was residing in South Korea and Singapore at the time of the alleged fraud, is also in the midst of a fierce extradition battle. Wanted by the United States and South Korea on criminal charges, he is detained in Montenegro and was not present at the civil trial in Manhattan.
In its complaint filed last year, the SEC accused Terraform and Kwon of masterminding a massive crypto fraud between April 2018 and May 2022, which reportedly resulted in a $40 billion loss in market value.
The regulator had said the defendants marketed their digital assets with misleading statements, such as telling investors that a popular South Korean mobile payment app used the Terra blockchain to settle transactions that would add value to the luna token.
Terraform filed for Chapter 11 bankruptcy protection in Delaware earlier this year.
An attorney for Kwon did not immediately respond to requests for comment.