The US Securities and Exchange Commission has charged Terraform Labs (Terra) and its CEO and co-founder, Do Kwon, with 'orchestrating a multi-billion dollar crypto asset securities fraud involving an algorithmic stablecoin and other crypto asset securities'.
In a press release, the SEC alleges Terra and Mr Kwon marketed crypto asset securities to investors seeking to earn a profit and repeatedly claimed the tokens would increase in value. The 55-page complaint paints the entire Terra ecosystem as an elaborate fraud orchestrated by Terra and several collaborators.
Chair of the SEC, Gary Gensler, summarised the charges in the complaint:
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...We also allege that they committed fraud by repeating false and misleading statements
The SEC complaint revealed that, in May 2021, Terra engaged in undisclosed discussions with a third party which intervened by purchasing significant quantities of UST, the native stablecoin of the Terra blockchain, during a minor de-pegging event, with a view to re-establishing its 1:1 peg to the dollar. These discussions were not made public, and UST was branded as "automatically self-healing" creating the perception that the so-called stablecoin's peg had been restored without human intervention. These claims sought to re-assure confidence in the algorithm which purportedly underpinned the un-backed stablecoin's value.
The SEC alleges that Terra's misrepresentations go deeper, specifically that Do Kwon misrepresented the extent and duration of Terra's relationship with the Chai payments platform, an e-commerce system in South Korea. According to the complaint, Do Kwon created a fake server to simulate transactions to deceive investors in the Terra ecosystem.
In a final blow, the SEC alleges that Mr Kwon and his associates transferred over 10,000 bitcoin from Terraform and the Luna Foundation Guard (which was established to defend UST's peg) to an unhosted wallet, $100 million of which has been converted into fiat through a Swiss bank account. This apparent gross self-dealing stands in contrast to the losses suffered by UST holders recorded in the complaint.
The charges against Mr Kwon and Terraform involve securities fraud, conducting an unregistered securities offering and further securities violations.
The action against Terra is the latest in several high profile crypto-related regulatory actions initiated by the SEC this year, including actions involving Gemini, Kraken and Paxos. It seems unlikely that Terraform and Kwon will defend the action with Kwon reportedly on the run in Serbia. The securities law issues raised by the SEC's claim are therefore likely to go untested in the Courts.