The SEC said that it has charged Terraform Labs PTE Ltd. and Do Hyeong Kwon of Singapore with fraud involving an algorithmic stablecoin and other crypto asset securities totalling multiple billion dollars.
Charges on Terraform
According to the Securities and Exchange Commission’s complaint, Terraform and Kwon raised billions of dollars from investors by marketing and selling a suite of interconnected crypto asset securities, many of which were sold in unregistered transactions between April 2018 and May 2022, when the scam finally collapsed.
Terra USD (UST), an “algorithmic stablecoin” that reportedly maintained its peg to the U.S. dollar by being interchangeable with another of the defendants’ crypto asset securities, LUNA, and “mAssets,” security-based swaps designed to pay returns by mimicking the price of equities of US corporations. According to the complaint, Terraform and Kwon also sold investors security tokens for their crypto assets called MIR (short for “mirror”) and LUNA.
The SEC alleges in its complaint that Terraform and Kwon lied about the worth of their tokens while offering them to investors as securities. For instance, they promoted and sold UST under the guise of a “yield-bearing” stablecoin that, via the Anchor Protocol, could generate interest of up to 20%.
Claiming that a prominent Korean mobile payment app used the Terra blockchain to settle transactions that would add value to LUNA, Terraform and Kwon are accused of fraud by the SEC for promoting the LUNA token. Nevertheless, allegations have surfaced that Terraform and Kwon lied to investors about UST’s viability. The value of UST and its sister tokens nearly reached zero in May 2022 when they debugged from the U.S. currency.
Specifically for LUNA and Terra USD, SEC Chair Gary Gensler claims that “Terraform and Do Kwon failed to provide the public with full, fair, and truthful disclosure as required.” We also claim that fraud was committed by the defendants through their use of materially false and misleading representations made repeatedly to induce investors to put money into the company.
Chair Gensler continued, “I appreciate the SEC’s hard-working staff, who remained attentive in such an important inquiry even when the defendants attempted to prevent us from acquiring crucial information about their business.” “This case highlights the strength and devotion of the SEC’s dedicated public servants while also demonstrating the lengths some crypto businesses will take to evade complying with the securities laws.
Gurbir S. Grewal, the SEC’s Director of the Division of Enforcement, said, “Today’s action not only holds the defendants accountable for their roles in Terra’s collapse, which devastated both retail and institutional investors and sent shock waves through the crypto markets, but it also highlights, once again, that we look to the economic realities of an offering, not the labels put on it.” – As per by SEC report
“Our complaint states that the Terraform ecosystem is not decentralized and is not a financial system. The so-called “algorithmic stablecoin” was little more than a front for a fraud in which the defendants, not the code, determined the price.”
The action was filed in the U.S. District Court for the Southern District of New York and asserts that the defendants violated the Securities Act and the Exchange Act’s registration and anti-fraud provisions.
Roger Landsman, Elisabeth Goot, Kathleen Hitchins, James Murtha, Daniel Koster, Donald Battle, and David Crosbie from the Complex Investigatory work was conducted by the Financial Instruments, Crypto Assets, and Cyber Sections, supervised by Reid Muoio, Osman Nawaz, Jorge Tenreiro, and David Hirsch.
