Co-founder and former chief executive officer of Terraform Labs PTE Ltd, Do Hyeong Kwon, extradited from Montenegro has been accused of misrepresenting a couple of crypto platforms.
A superseding indictment that was unsealed against Kwon alleged that the former Terraform CEO engaged in multiple schemes to deceive investors to inflate the value of Terraform’s cryptocurrencies fraudulently.
Kwon appeared in court Thursday in Manhattan to face federal fraud charges.
The Stablecoin Misrepresentations: Kwon made misrepresentations about the effectiveness of the system that lay at the heart of Terraform’s cryptocurrency empire, the “Terra Protocol,” which purportedly used a computer algorithm to maintain the value of Terraform’s so-called “stablecoin” pegged to the U.S. dollar, TerraUSD (UST), at a value of $1 for one UST.
But as Kwon knew, after the Terra Protocol failed to cause the restoration of UST’s $1 peg in May 2021, Kwon reached an agreement with executives at a high-frequency trading firm (the Trading Firm) so that the Trading Firm would purchase large amounts of UST in order to artificially support UST’s $1 peg.
The LFG Misrepresentations: Kwon made misrepresentations about the governance of the Luna Foundation Guard Ltd. (LFG), which Kwon claimed was managed by an independent governing body and was tasked with deploying billions of dollars’ worth of financial reserves to defend UST’s peg. But as Kwon knew, he controlled both the LFG and Terraform.
In addition, Kwon misappropriated hundreds of millions of dollars in assets from the LFG. Kwon and others acting at his direction sought to launder those misappropriated funds through transactions designed to conceal and disguise the nature, location, source, ownership, and control of the funds.
The Mirror Misrepresentations: Kwon made misrepresentations about the success and operation of an investing platform on Terraform’s blockchain (the Terra blockchain) called Mirror Protocol (Mirror), which purportedly allowed users to create, buy, and sell synthetic versions of stocks listed on U.S. securities exchanges.
Kwon claimed that Mirror operated in a decentralized manner and that he and Terraform played no role in Mirror’s governance. But as Kwon knew, he and Terraform secretly maintained control over Mirror and used automated trading bots to manipulate the prices of synthetic assets that Mirror issued. Kwon also caused Terraform to inflate key user metrics to deceive investors.
The Chai Misrepresentations: Kwon falsely claimed that the Terra blockchain was being used to process billions of dollars in financial transactions for the Korean payment-processing application Chai.
In doing so, Kwon claimed that the Terra blockchain had “real world” applications or uses, as distinct from competing cryptocurrency platforms. But as Kwon knew, Chai processed transactions through traditional financial processing networks, not the Terra blockchain.
The Genesis Coin Misrepresentations: Kwon made misrepresentations about the use of a supply of one billion stablecoins programmed into the Terra blockchain at its creation (the Genesis Stablecoins), which were purportedly held in reserve for Terraform for certain specified uses.
But Kwon used at least $145 million worth of Genesis Stablecoins, among other things, to fund fake Chai blockchain transactions and trading bots to manipulate the prices of synthetic assets that Mirror issued.
