By Luc Cohen

Compiled by: TechFlow

Introduction

Terraform Labs co-founder Do Kwon is facing serious legal challenges for his role in causing the TerraUSD crash in 2022. On December 31 (according to Bloomberg), the Prime Minister of Montenegro said that the extradition process for Terraform Labs co-founder Do Kwon to the United States had been completed. The U.S. Securities and Exchange Commission (SEC) has filed multiple fraud charges against him, including securities fraud and money laundering. How is the hearing going and how will the case develop?

TechFlow compiled this article to follow up on Kwon’s latest developments and case progress at his latest hearing after his extradition.

Police escort Terraform Labs co-founder Do Kwon in Podgorica, Montenegro. He was transferred on March 23, 2024, after serving a prison sentence for document forgery.

text

summary

  • Kwon extradited from Montenegro to the U.S. to face criminal charges

  • Prosecutors accuse Kwon of misleading investors in TerraUSD project

  • Several cryptocurrency giants have been sued following the 2022 market crash

South Korean cryptocurrency entrepreneur Do Kwon, the developer of two digital currencies, TerraUSD and Luna, which have caused investors to lose an estimated $40 billion in the 2022 market crash, pleaded not guilty to criminal fraud charges in court on Thursday after being extradited to the United States from Montenegro this week.

Manhattan federal prosecutors unsealed a nine-count indictment Thursday charging Terraform Labs co-founder Kwon, the developer of the TerraUSD and Luna cryptocurrencies, with securities fraud, wire fraud, commodities fraud, and money laundering conspiracy. The charges are directly related to the TerraUSD and Luna crashes.

Kwon appeared in Manhattan federal court on Thursday, wearing an olive green long-sleeved shirt and black sweatpants. During the hearing, his attorney, Andrew Chesley, pleaded not guilty. U.S. District Judge Robert Lehrburger ordered Kwon to remain in custody after his attorney said he would not request bail for the time being. After the hearing, Kwon was handed a 79-page indictment and escorted from the court by U.S. Marshals. He is expected to appear in court again on January 8.

In fact, as early as June last year, Kwon reached a settlement with the U.S. Securities and Exchange Commission (SEC) for $4.55 billion in civil cases related to the collapse of TerraUSD and Luna. As part of the agreement, he agreed to pay a fine of $80 million and was banned from participating in any cryptocurrency transactions. However, this did not prevent him from continuing to face charges in the criminal case.

According to Thursday’s indictment, Manhattan prosecutors accused Kwon of misleading investors in his 2021 promotion of TerraUSD, a cryptocurrency known as a “stablecoin” designed to always maintain a value of $1.

The indictment alleges that when TerraUSD fell below $1 in May 2021, Kwon claimed that an algorithm called “Terra Protocol” restored its value. But in reality, he arranged for a high-frequency trading firm to secretly purchase millions of dollars of tokens to artificially inflate the price.

Prosecutors said Kwon’s false statements attracted a large number of retail and institutional investors to buy Terraform’s products, which directly drove up the price of Luna tokens, which are closely linked to TerraUSD. Luna is a volatile cryptocurrency with a market value of as much as $50 billion in the spring of 2022.

“This growth was largely dependent on Kwon’s blatant fraud regarding Terraform and its technology,” the indictment reads.

However, when TerraUSD’s value fell sharply again in May 2022, an unnamed trading firm warned that “it will not be easy to stabilize its price this time.”

Ultimately, TerraUSD and Luna both collapsed that month, an event that not only caused a sharp drop in the prices of other cryptocurrencies such as Bitcoin, but also triggered severe turbulence in the entire crypto market.

Although prosecutors did not reveal the name of the trading firm, the U.S. Securities and Exchange Commission (SEC) pointed out in its civil case that Jump Trading helped stabilize the price of TerraUSD in May 2021. Jump Trading has not yet responded to this.

Montenegro detention incident

In the U.S. Securities and Exchange Commission’s (SEC) lawsuit against Terraform, a Manhattan federal jury found Kwon and Terraform liable last April for defrauding cryptocurrency investors.

Terraform’s lawyers argued in closing arguments that the company and Kwon were always truthful about their products and how they worked, even when those products ultimately failed.

However, Kwon did not attend that trial, as he has been detained in Montenegro on charges of forgery of documents since March 2023. He was handed over to American police at the airport in the Montenegrin capital of Podgorica on Tuesday.

Terraform declared bankruptcy as early as January last year.

Kwon is one of several cryptocurrency moguls facing federal charges for alleged violations following the 2022 digital currency market crash, which not only led to the closure of several companies but also had a profound impact on the entire industry.

For example, Sam Bankman-Fried, the founder of the FTX exchange, was found guilty in March last year of misappropriating up to $8 billion in client funds and sentenced to 25 years in prison. He is currently appealing the verdict.

In addition, Alex Mashinsky, founder and former CEO of cryptocurrency lending platform Celsius Network, also pleaded guilty to two counts of fraud last month.