The Securities and Exchange Commission on Thursday filed a fraud charge against Terraform Laboratories and its CEO, Do Kwon asserting that they masterminded a multibillion dollar “crypto asset securities fraud.”
The Terraform Laboratories and its founder Do Kwon are defendants in a case brought by the United States Securities and Exchange Commission (SEC), which accuses them of “orchestrating a multi-billion dollar crypto asset securities scheme.”
The algorithmic stablecoin TerraClassicUSD (USTC) and its associated cryptocurrency Terra Luna Classic were mentioned by the SEC in a statement made on February 16 as being marketed and sold by Kwon and Terraform (LUNC).
Gary Gensler, the SEC’s chairman, stated in a statement:
“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. We also allege that they committed fraud by repeating false and misleading statements to build trust before causing devastating losses for investors.”
The Securities and Exchange Commission (SEC) filed a complaint with the U.S. District Court for the Southern District of New York alleging violations of the anti-fraud and registration provisions of the Securities Act and the Exchange Act.
“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,” said Gensler.
“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,” he added.
Kwon and Terraform are accused of conspiring to raise billions of dollars from investors through the offer and sale of a “inter-connected suite” of cryptocurrency asset securities, including securities-based swaps that mirrored U.S. equities and, most notably, the infamous “algorithmic stablecoin” TerraUSD, between April 2018 and the collapse of TerraUSD, also known as UST, and its sister coin luna in May 2022. According to the complaint, the firm promoted UST as a coin that would “earn” interest up to 20 percent.
UST was tied to the dollar at a 1:1 ratio, like many stablecoins. One LUNA had to be “burned,” or systematically destroyed, in order to produce one new UST. This mechanism allowed for arbitrage opportunities that were essential to maintaining the peg: Users could always exchange one luna for one UST at a guaranteed price of $1, regardless of the market price of either token at the moment.
However, the price of LUNA started to fluctuate, forcing UST to abandon its $1 peg, which pushed the price of both terra and LUNA into a nosedive.
Kwon and Terraform are accused of breaking the anti-fraud and registration sections of both the Securities and Exchange Acts in the lawsuit against them that was lodged in federal court for the Southern District of New York in Manhattan.