Terraform Labs CEO Do Kwon Faces Allegations of Violating US Securities Law

A federal judge ruled on Thursday that Terraform Labs CEO Do Kwon and the company violated U.S. securities law. The ruling comes from the failure to register two digital currencies, TerraUSD and Luna, which experienced a collapse in 2022.

U.S. District Judge Jed Rakoff in Manhattan sided with the Securities and Exchange Commission (SEC), stating that Terraform Labs breached the law in connection with the implosion of TerraUSD and Luna.
Despite the ruling, the denial of summary judgment on the SEC’s fraud claims pushes the case toward a January 29, 2024, trial. The judge dismissed SEC claims of illegal offering of security-based swaps.

Terraform Labs contested the decision vehemently, expressing strong disagreement and asserting that its tokens were not securities. The company pledged to continue defending against what it deemed the SEC’s “meritless” fraud claims during the upcoming trial.

Terraform Labs CEO Do Kwon Extradition Battle and Fraud Charges in Manhattan

South Korean native Do Kwon, the force behind TerraUSD and Luna, faces fraud charges from U.S. prosecutors in Manhattan. Currently fighting extradition from Montenegro, where he was arrested in March, Kwon designed TerraUSD as a stablecoin and Luna as a more traditional token linked to TerraUSD.

In May 2022, both cryptocurrencies collapsed as TerraUSD lost its $1 peg, resulting in losses exceeding $40 billion. The SEC argued that four of the defendants’ crypto assets, including TerraUSD and Luna, were unregistered securities under the definition of “investment contracts.”

❗️⚖️ UST, LUNA, wLUNA and MIR tokens are securities!

– A U.S. court ruled in favor of the SEC in a case against Terraform Labs.

"Terraform Labs and its former CEO Do Kwon offered and sold unregistered securities of UST, LUNA, wLUNA and Mir."#ustc $ustc #sec #luna $lunc #luna pic.twitter.com/c9Q5hLFNvZ

— Nagaev Ruslan  (@Nagaev_929) December 29, 2023

In a detailed 71-page decision, Judge Rakoff emphasized that there was “no genuine dispute” that the four crypto assets qualified as securities under a precedent set by a 1946 U.S. Supreme Court decision (SEC v. WJ Howey Co).

However, the judge acknowledged that reasonable jurors could differ on whether the defendants intended to defraud investors in various statements about Terraform’s business, including TerraUSD’s temporary failure and the role of a Korean payment app in supporting Luna’s value.

After the resolution of fraud claims, the SEC will decide remedies for the sale of unregistered securities in this legal case.