The U.S. Securities and Exchange Commission (SEC) has charged Terraform Labs (TFL) and its CEO Do Kwon with orchestrating a multi-billion-dollar securities fraud.
Today we charged Singapore-based Terraform Labs PTE Ltd and Do Hyeong Kwon with orchestrating a multi-billion-dollar crypto asset securities fraud involving an algorithmic stablecoin and other crypto asset securities.
— U.S. Securities and Exchange Commission (@SECGov) February 16, 2023
“[…] from April 2018 through the collapse of the scheme in May 2022, Terraform and Kwon raised billions of dollars from investors by offering and selling a linked bundle of crypto asset securities,” the statement said.
In particular, the SEC named algorithmic stablecoin TerraUSD (UST) and the LUNA token. The agency added that the Singapore-based company together with its leadership misled investors by promising asset price appreciation and assuring their stability.
According to the SEC Chair Gary Gensler, Terraform and Do Kwon did not present to the public “a full, fair and honest disclosure of information.”
“We also allege that they engaged in fraud by repeating false and misleading statements to gain trust before inflicting devastating losses on investors,” he stressed.
The SEC chief noted that this case shows what some crypto firms are willing to do to avoid securities laws compliance.
“Today’s action not only holds the defendants accountable for their role in the Terra collapse, which devastated both retail and institutional investors and sent shockwaves through crypto markets, but also underscores that we look at the economic realities of the offering, not the labels attached to it. … It was simply fraud, backed by the so-called algorithmic “stablecoin,” whose price was controlled by the defendants, not by any code,” said SEC enforcement director Gurbir Grewal.
According to the press release, the complaint was filed in the Southern District of New York.
Delphi Digital’s chief legal officer Gabriel Shapiro called the SEC’s chosen vector a “roadmap” for pursuing stablecoins. In his view, the work done in the Kwon and TFL case was “more thorough than usual.”
you can expect the argument for UST being a security to be a roadmap for how the SEC goes after other stablecoins
they will allege that integration, promotion, marketing, commercial deals etc building the stablecoin ecosystems are «efforts of others» that are «reasonably… https://t.co/2X3SvtWMaU pic.twitter.com/q1odgQcNSA
— _gabrielShapir0 (@lex_node) February 16, 2023
“[The SEC] will argue that integration, promotion, marketing, and commercial deals, etc., that build stablecoin ecosystems are “efforts of others” that are “reasonably expected” to yield profits,” explained Shapiro.
The Bankless host Ryan Sean Adams echoed the sentiment, noting that an SEC victory in this case would “create a broad precedent for greater control over cryptocurrency.”
Gensler’s next strategy is to go after Do Kwon and UST because he knows no one will defend them and if he wins he’ll establish broad precedent for more control over crypto.
It’s evil genius. https://t.co/FDLoeVcTLb
— RYAN SΞAN ADAMS — rsa.eth ??? (@RyanSAdams) February 16, 2023
According to the иску SEC, the defendants transferred “more than 10 000 BTC from Terraform and Luna Foundation Guard accounts to a cold wallet.” According to the agency, since May 2022 Kwon and his company “periodically” sent these funds to a financial institution based in Switzerland and converted them into cash.
“Since June 2022 and as of the filing date, more than $100 million in fiat has been withdrawn from this Swiss bank,” the SEC said.
As reported in November, Do Kwon is in Serbia.