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Highlights
- The SEC initiated a civil trial against Terraform Labs, accusing it of a multi-billion dollar fraud involving crypto-asset securities.
- SEC lawyers described Terraform Labs as a financial disaster, emphasizing the severe losses faced by investors.
- Do Kwon, co-founder of Terraform Labs, was absent from the trial's first day following his arrest and recent release in Montenegro.
The U.S. Securities and Exchange Commission (SEC) opened its civil trial against Terraform Labs by casting the blockchain firm as a fraudulent operation. At the court proceedings in the Southern District of New York, SEC lawyers portrayed Terraform Labs as a financial disaster where investors experienced huge losses. The trial was initiated over a year after the Securities and Exchange Commission accused Terra and its co-founder Do Kwon of perpetrating a multi-billion dollar fraud on crypto-asset securities in February 2023.
Devon Staren of the SEC depicted Terra as a “house of cards” that collapsed on its investors in 2022. This case represents a landmark in the fight against the accused scam that resulted in a huge collapse of the crypto market. The fall of TerraUSD (UST), which led to the damages to TerraLUNA and other tokens, became a reason for the chain of losses for many companies in the crypto sphere.
Terraform Labs Trial Begins Without Do Kwon
Do Kwon, one of the co-founders of Terraform Labs, was noticeably missing on the first day of the trial. Kwon was arrested in Montenegro in March 2023 for using counterfeit travel documents and was sentenced to four months. The trial participation of Kwon is not clear, although he was recently released on March 23 while awaiting extradition. The court drama associated with Terraform Labs and Kwon is still active, illustrating the complications related to it.
The SEC’s lawsuit is based on claims that Terra and Kwon misled investors as to the robustness of its algorithmic stablecoin, TerraUSD (UST). The misrepresentation is reported to have caused a significant part in the general instability throughout the process. Originally scheduled for January, the start of the trial was moved to March, hoping that Kwon might plead in person. But his role in the investigation is still unclear.
Judge Rakoff Rules Partly for SEC in Terra Case
A major legal milestone was realized in December 2023 when Judge Jed Rakoff passed a partial ruling in favor of the SEC. The decision stated that Terraform Labs had been dealing with unregistered securities, which was a crucial point in the case. On the contrary, the court also decided on the side of Kwon and the platform concerning the offer and sale of security-based swaps. This ambivalent ruling highlights the intricate legal environment of cryptocurrency activities and regulatory conformity.
The Terraform Labs trial is among several pivotal cases poised to shape the crypto industry’s legal framework in 2024. Notably, former FTX CEO Sam Bankman-Fried is set to receive his sentence on March 28 following a conviction on seven felony charges. In another significant case, former Binance CEO Changpeng Zhao, after admitting guilt to a felony charge, awaits his sentencing scheduled for April 30. These proceedings reflect the broader regulatory scrutiny and legal challenges facing the cryptocurrency sector.
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