Jury Begins Deliberations in Civil Fraud Case Against Do Kwon, Terraform Labs

• A New York jury has begun deliberations in the SEC’s civil fraud case against Terraform Labs and its co-founder Do Kwon

• The SEC has accused the defendants of misleading investors about the stability of its so-called “algorithmic stablecoin,” Terra USD

NEW YORK – Lawyers for the U.S. Securities and Exchange Commission (SEC) rested their case against Terraform Labs and its co-founder, Do Kwon, on Friday, releasing a New York jury to decide whether Kwon and his company are liable for allegedly misleading investors about the stability of Terra USD (UST) and its integration with a Korean mobile payments app.

The so-called “algorithmic stablecoin” was supposed to maintain a peg to the U.S. dollar through on-chain mint-and-burn mechanics with its sister token, LUNA. But in May 2022, the UST de-pegged and began a death spiral that eventually took down the entire Terra ecosystem, wiping out approximately $40 billion in market value in its wake.

During its case, the SEC argued that Kwon and, under his direction, Terraform Labs deceived everyday investors about the nature of that algorithm, implying that it allowed UST to “naturally heal” and “automatically self-heal” in the event of a de-peg.

But there was no self-healing or algorithmic magic that kept UST pegged to the dollar, the SEC argued. Instead, the value of UST was maintained through continuous trading activity, including large-scale trading done by institutional investors.

During her closing arguments on Friday, SEC attorney Laura Meehan told the jury that during a prior de-peg in May 2021, Kwon and Terraform Labs made a “secret agreement” with Jump, a trading shop that acted as a market maker for Terraform Labs, to step in and buy millions of dollars of UST off-chain to inflate the value and bring it back to parity with the dollar.

Meehan added that after Jump’s intervention, Kwon and his company intentionally kept Jump’s involvement quiet, wanting instead to use the re-pegging as evidence of the algorithm’s effectiveness.

“Defendants lied for years. They lied about the success and size of their blockchain … they lied about the stability of their algorithm,” Meehan said. “They’re still parading themselves around like they’re a real company, like they’re legitimate.”

As Meehan neared the end of her remarks, the Manhattan courtroom gently shook – not, as District Court Judge Jed Rakoff quipped, “with the force of the SEC’s arguments” but with the tremors of a 4.8 magnitude earthquake in neighboring New Jersey.

Defense pushes back

Lawyers for Terraform Labs and Do Kwon made their closing arguments after the SEC, pausing intermittently as emergency alerts for the earthquake periodically sounded from cell phones across the courtroom.

The defense, led by attorney Louis Pellegrino, told the jury that the mobile payment app Chai did, in fact, utilize the Terra blockchain for a variety of things, including refunding purchases and providing liquidity.

But mostly, Pellegrino’s argument focused on the alleged “secret agreement” between Jump and Terraform Labs, and whether or not Kwon and his company had actually lied to investors about the nature of the algorithm.

“The mechanism was not a computer that functioned on its own,” Pellegrino said. “It wasn’t some magical machine…and everyone knew it.”

Minting-and-burning to maintain the peg had to be done by market participants, he argued, and Kwon and Terraform Labs had “never claimed” otherwise. Those market participants included companies like Jump – which Pellegrino said had a formal agreement, not a secret one, to provide liquidity to Terraform Labs when needed.

“All reasonable purchasers knew about the risks,” Pellegrino argued, pointing to a trading memo from Galaxy Digital citing the inherent risk of a collapse of the ecosystem.

When that collapse eventually came, Pellegrino said, it was as the result of a devastating short attack – carried out by hedge funds including Wintermute Trading, Celsius, and Jane Street – that made Terraform Labs a victim alongside its investors.

“Terraform is still here, trying to make things better,” Pellegrino said. “Terraform is no house of cards.”

Terraform Labs filed for bankruptcy protection in January. During his testimony earlier this week, current CEO Chris Amani testified that the company had approximately $150 million in assets remaining and that he made an annual salary of $3 million.

No Do

Former CEO and defendant Do Kwon was absent from court for the duration of the trial. Kwon remains in Montenegro, where he has been since his March 2023 arrest for using fake Costa Rican travel documents en route to Dubai after months on the lam.

Kwon served a prison sentence for his crime but was released on bail and placed under house arrest in the Balkan country last month. The country’s Supreme Court is currently weighing competing extradition requests from the U.S. and South Korea, Kwon’s native country, which both want to try him on criminal fraud charges in addition to civil ones.

Kwon’s ultimate destination remains unclear.