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SEC Charges Terraform and CEO Do Kwon with Multi-Billion Dollar Crypto Securities Fraud

The U.S. Securities and Exchange Commission (SEC) has charged Singapore-based Terraform Labs PTE Ltd and its CEO Do Hyeong Kwon with orchestrating a multi-billion dollar crypto asset securities fraud involving an algorithmic stablecoin and other crypto asset securities. The SEC’s complaint alleges that Terraform and Kwon raised billions of dollars from investors by offering and selling an interconnected suite of crypto asset securities, many in unregistered transactions, from April 2018 until the scheme’s collapse in May 2022.

Do Hyeong Kwon

The suite of crypto asset securities included “mAssets” security-based swaps, which were designed to pay returns by mirroring the price of stocks of US companies, as well as Terra USD (UST), a crypto asset security referred to as an “algorithmic stablecoin” that supposedly maintained its peg to the U.S. dollar by being interchangeable for another of the defendants’ crypto asset securities, LUNA. The complaint also alleges that Terraform and Kwon offered and sold 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 further alleges that Terraform and Kwon marketed these crypto asset securities to investors seeking to earn a profit, repeatedly claiming that the tokens would increase in value. For example, they touted and marketed UST as a “yield-bearing” stablecoin, which they advertised as paying as much as 20 percent interest through the Anchor Protocol. Meanwhile, Terraform and Kwon allegedly misled investors about the stability of UST. In May 2022, UST depegged from the U.S. dollar, and the price of it and its sister tokens plummeted to close to zero.

SEC Chair Gary Gensler stated, “We allege that Terraform and Do Kwon failed to provide the public with full, fair, and truthful disclosure as required for a host of crypto asset securities, most notably for LUNA and Terra USD. We also allege that they committed fraud by repeating false and misleading statements to build trust before causing devastating losses for investors.” Gurbir S. Grewal, Director of the SEC’s Division of Enforcement added, “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 once again highlights that we look to the economic realities of an offering, not the labels put on it.”

The complaint, which was filed in the U.S. District Court for the Southern District of New York, charges the defendants with violating the registration and anti-fraud provisions of the Securities Act and the Exchange Act. The investigation was conducted by the SEC’s Complex Financial Instruments and Crypto Assets and Cyber Units and was supervised by Reid Muoio, Osman Nawaz, Jorge Tenreiro, and David Hirsch. The litigation is being handled by the SEC’s Trial Unit.

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