SEC Charges Terraform and CEO Do Kwon with Defrauding Investors in Crypto Schemes

The Securities and Exchange Commission (SEC) has filed charges against Terraform Labs PTE Ltd and Do Hyeong Kwon, a Singapore-based company, for a multi-billion dollar cryptocurrency asset securities fraud involving an algorithmic stablecoin and other crypto asset securities. According to the SEC’s complaint, from April 2018 until May 2022, Terraform and Kwon raised billions of dollars from investors by selling unregistered transactions of an inter-connected suite of crypto asset securities, including “mAssets” and Terra USD (UST), which is a crypto asset security referred to as an “algorithmic stablecoin”. The SEC’s complaint alleges that Terraform and Kwon marketed these crypto asset securities to investors as a means to earn a profit, repeatedly claiming that the tokens would increase in value. However, in May 2022, UST depegged from the U.S. dollar, and the price of it and its sister tokens plummeted to close to zero.

Terraform and Kwon also allegedly misled investors about the stability of UST, and they marketed it as a “yield-bearing” stablecoin that could pay up to 20% interest through the Anchor Protocol. Terraform and Kwon further offered investors other means to invest in their crypto empire, including the crypto asset security tokens MIR or “mirror” tokens and LUNA itself. The SEC’s complaint alleges that Terraform and Kwon repeatedly deceived investors about the Korean mobile payment application that used the Terra blockchain to settle transactions that would accrue value to LUNA.

The complaint, which was filed in the U.S. District Court for the Southern District of New York, charges the defendants with violating Sections 5(a), 5(c), and 5(e) of the Securities Act of 1933 (Securities Act), Section 17(a) of the Securities Act, and Sections 10(b), 6(l), and 20(a) of the Securities Exchange Act of 1934 (Exchange Act), and Rule 10b-5 thereunder. The investigation was conducted by the Complex Financial Instruments and Crypto Assets and Cyber Units and supervised by several SEC officials, while the litigation is being handled by the Trial Unit.