- The SEC has labeled the Terra ecosystem a “house of cards” on the opening day of its case against the company and co-founder Do Kwon
- Kwon, still in Montenegro awaiting extradition, faces allegations of a multi-billion dollar crypto asset securities fraud, leading to $40 billion in losses.
- Kwon’s destination is not yet confirmed, meaning he could miss the whole thing
Do Kwon and his fellow Terraform Labs executives built a “house of cards,” according to an attorney for the Securities and Exchange Commission (SEC) on the opening day of the agency’s case against the South Korean. Kwon, who is still in Montenegro awaiting extradition to either the US or South Korea, was also accused of operating a “multi-billion dollar crypto asset securities fraud” in the form of the Terra ecosystem, which collapsed in 2022, losing holders around $40 billion. The trial was delayed to allow Kwon more time to be brought to the US, but this may not now happen until after the trial concludes.
SEC Treads Expected Path
The SEC took a highly anticipated route in its opening statements, accusing Kwon of running a fraudulent scheme that was bound to collapse, with no protection for token holders. Attorney Devon Staren also accused Kwon of misleading investors about the stability of TerraUSD, the stablecoin designed to maintain a value of $1 through market dynamics.
The LUNA cryptocurrency entered a death spiral in May 2022 following the depegging of UST to one dollar, which led to anyone being able to mint $1 of Luna with 1 UST. This meant they could also buy 1 UST for $0.7, mint $1 of LUNA from it, and then sell that LUNA on the open market for a profit. This continued until both coins died and the entire ecosystem collapsed.
Louis Pellegrino, representing Terraform Labs, argued that the SEC’s case relied on cherry-picked evidence and witness testimonies aimed at securing whistleblower payouts. Similarly, Kwon’s attorney, David Patton, contended that while Terra experienced failure, it did not equate to fraud, emphasizing that Kwon never presented Terra’s cryptocurrency as entirely risk-free.
Kwon May Miss Trial
Kwon himself was supposed to be attending the trial following his extradition to the US in time for the delayed start, but the back and forth over his extradition, which has been approved and then revoked more times than Kwon lied about the health of the Terra platform, had led to him still not knowing where he will end up. A final decision on this is expected soon, with both the US and South Korea wanting to prosecute him over the Terra affair.
Kwon faces federal charges in the US as well as his civil suit with the SEC, although Terraform’s bankruptcy filing in January complicates the situation. US District Judge Jed Rakoff previously ruled that Terraform Labs unlawfully sold digital assets without registering them as securities but has yet to determine the damages Terraform must pay.
However, the company has warned that the penalty could exceed its assets, with the bankruptcy filing potentially meaning that little to nothing is actually paid out.
