Jury finds Do Kwon and Terraform Labs liable for crypto fraud, in win for SEC

By Chris Matthews

'The defendants caused devastating losses for investors and wiped out tens of billions of market value nearly overnight,' SEC says

The Securities and Exchange Commission notched a victory in its battle with noncompliant cryptocurrency companies after a jury in New York on Friday found crypto mogul Do Kwon and his company Terraform Labs liable for defrauding investors in crypto securities.

"Terraform Labs and Kwon, its former CEO, deceived investors about the stability of the crypto asset security and so-called algorithmic stablecoin Terra USD," Gurbir Grewal, SEC enforcement director, said in a statement.

"Through these deceptions, the defendants caused devastating losses for investors and wiped out tens of billions of market value nearly overnight," he added. "For all of crypto's promises, the lack of registration and compliance have very real consequences for real people."

At its peak in May 2022, TerraUSD was the third most popular stablecoin, with a market capitalization of nearly $20 billion. A few weeks later, the blockchain ceased to function, and investors in the coin and related cryptocurrency LUNA saw billions of dollars in wealth vanish.

"We are very disappointed with the verdict, which we do not believe is supported by the evidence," a Terraform Labs spokesperson said in an email. "We continue to maintain that the SEC does not have the legal authority to bring this case at all, and we are carefully weighing our options and next steps."

The outcome represents a victory for the SEC in its ongoing battle in the courts to claim jurisdiction over the crypto industry, with the regulator claiming that most crypto tokens other than bitcoin are securities whose issuers must register with the SEC and provide the public with regular disclosures about their operations.

U.S. District Judge Jed Rakoff ruled in December that Terraform was liable for selling unregistered securities, a decision that paved the way for Friday's jury verdict.

The SEC is also engaged in high-stakes litigation with several crypto exchanges, including Coinbase Global Inc. (COIN), Binance and Kraken, which it says have violated federal securities laws by not registering with the agency. Those lawsuits also accuse up-and-coming crypto projects like Solana (SOLUSD) Cardano (ADAUSD) and Polygon (MATICUSD) of failing to register with the agency.

-Chris Matthews

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04-05-24 1624ET

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