Terraform co-founder Do Kwon found liable for fraud: reports

A jury has found that the co-founder of Terraform Labs, Do Hyeong Kwon, misled investors and was found liable for fraud, according to multiple reports. 

The Securities and Exchange Commission charged Terraform and Kwon in February 2023 over the algorithmic stablecoin Terra LUNA -4.97% USD, which collapsed in a dramatic fashion a year earlier.  

The agency said the Singapore-based company and Kwon raised billions from investors by “offering and selling an inter-connected suite of crypto asset securities, many in unregistered transactions.”

Algorithmic stablecoins, like terra USD (UST), use market incentives via algorithms to maintain a stable price. Terra was linked to luna, a governance token, to keep the prices stable. UST crashed in May 2022, wiping out more than $50 billion.

The SEC said Terraform and Kwon misled investors about the stability of UST. One example included Kwon and his team's claim that a Korean payments company called Chai was using the Terraform blockchain to settle millions of transactions. The SEC had said that wasn't true.

The main issues that the jury had to delve into revolved around the SEC's claims that Kwon and Terraform violated federal securities laws by engaging in fraud connected to the buying and selling of Terraform securities. Judge Rakoff earlier granted summary judgment to the SEC in its claim that Terraform and Kwon offered and sold unregistered securities. 

The first scheme the jury had to consider involved the SEC's allegation that Kwon said Chai used Terraform's technology in its line of business when it wasn't. The second is the SEC's allegation that the firm and Kwon did not make any false or misleading statements, according to Judge Jed Rakoff's preliminary instruction to the jury. 

Where is Do Kwon?

Kwon was released from a prison in Montenegro last month but will remain there as he faces criminal charges brought by authorities in several countries, including South Korea and the U.S. Between the two countries, his lawyers have reportedly preferred his home country where the maximum sentence for financial criminals typically ranges from 30 to 40 years. In contrast, the U.S. follows a principle where the court can impose consecutive sentences for each crime for which a defendant is found guilty.

Kwon was arrested in Montenegro in March 2023 for using a counterfeit passport while attempting to exit the country. Kwon had agreed to be extradited to South Korea. In June 2023, a Montenegro court sentenced him to four months in prison after finding him guilty of document forgery. Kwon appealed that court decision, lost the appeal and was finally sentenced to four months in jail.