US SEC Charges Tai Mo Shan With Fraud Over Terra USD Peg Stability Claims

The U.S. Securities and Exchange Commission (SEC) has charged Tai Mo Shan Limited, a subsidiary of Jump Crypto Holdings LLC, for misleading investors about the stability of Terra USD (UST), an algorithmic stablecoin created by Terraform Labs.

The SEC also accused Tai Mo Shan of unlawfully offering and selling LUNA, a cryptocurrency issued by Terraform, as unregistered securities.

Misleading Investors About Terra USD Peg Stability

The SEC alleged that Tai Mo Shan deceived investors by creating the impression that Terraform Labs’ algorithmic mechanism was maintaining the $1 peg of UST. When UST fell below its $1 value in May 2021, Tai Mo Shan entered an agreement with Terraform Labs to intervene in stabilizing the price. Under this agreement, Terraform incentivized Tai Mo Shan with discounted LUNA tokens to buy UST and attempt to restore its peg.

On May 19, 2021, Tai Mo Shan made substantial purchases of UST, totaling over $20 million, which temporarily stabilized the stablecoin’s price.

The SEC stated that these actions misled the market into believing that Terraform’s algorithm was maintaining the peg, while the stability was actually driven by Tai Mo Shan’s trades. This conduct was deemed negligent by the SEC, as investors were not informed about the reliance on external intervention to stabilize UST.

Role as a Statutory Underwriter for LUNA

The SEC’s findings revealed that Tai Mo Shan acted as a statutory underwriter for Terraform Labs by acquiring LUNA tokens with the intent to resell them on U.S.-based platforms.

From January 2021 to May 2022, Tai Mo Shan offered and sold these tokens as securities without proper registration, violating U.S. securities laws.

The SEC classified LUNA as a security, noting that Tai Mo Shan acquired the cryptocurrency from Terraform for distribution to the public. This activity further contributed to the SEC’s charges of unregistered securities offerings.

As part of the settlement, Tai Mo Shan agreed to pay $73.45 million in disgorgement, $12.91 million in prejudgment interest, and a $36.72 million civil penalty. These penalties aim to address the illegal gains obtained through misleading actions and unregistered transactions.

Tai Mo Shan neither admitted nor denied the findings of the SEC’s investigation. However, the company agreed to comply with a cease-and-desist order prohibiting future violations of federal securities laws.

US SEC’s Statement on Investor Protection

SEC Chair Gary Gensler emphasized the need for compliance in the crypto markets, stating, “Too many times in the crypto markets, we’ve seen investor losses due to fraud. Regardless of the labels, crypto market participants should comply with securities laws and not deceive the public. Otherwise, investors get hurt.”

The SEC also highlighted that Terraform Labs and its founder, Do Kwon, were found liable for fraud and unregistered securities offerings earlier in 2024. Terraform and Kwon agreed to pay $4.5 billion to compensate harmed investors, demonstrating the widespread fallout from the Terra ecosystem’s collapse.

This case marks another step in the SEC’s ongoing efforts to regulate the cryptocurrency industry and protect investors from deceptive practices.