Do Kwon’s Terraform Labs set for crypto trial next month

NEW YORK – Terraform Labs and the US Securities and Exchange Commission (Sec) will head to trial next month, with Jump Trading swept up in the mix, after a judge ruled that the SEC’s fraud case against Terraform must be tried by a jury.

US District Judge Jed S. Rakoff ruled in favour of the regulator on Dec 28, agreeing that Terraform is liable for selling unregistered securities, though he threw out allegations that it had made transactions in unregistered security-based swaps. The civil trial is set to begin on Jan 29 in Manhattan federal court.

The SEC sued Terraform and co-founder Do Kwon in February, alleging they offered and sold unregistered securities as part of a fraudulent scheme that wiped out at least US$40 billion (S$52.8 billion) in market value.

The trial will be a test of the SEC’s aggressive enforcement strategy across the crypto industry. It is also likely to reveal fresh details of Jump’s role as a key trader of Terraform’s algorithmic stablecoin TerraUSD and Luna tokens. The SEC claims Terraform secretly entered into an arrangement with the Chicago-based trading firm to prop up TerraUSD a year before it collapsed.

In his ruling, Judge Rakoff said the SEC’s evidence about the alleged arrangement is “compelling but circumstantial, relying in large part on the testimony of Jump whistleblowers whose credibility the jury will need to determine.”

Jump hasn’t been accused of any wrongdoing in the case.

Whistleblower testimony

Regulatory civil suits are usually delayed to allow criminal cases to play out in court first. But while Kwon has been indicted on fraud charges in the United States, he is still in custody in Montenegro, where he was caught traveling with a fake passport. Kwon is also wanted in his native South Korea.

Judge Rakoff’s ruling cited a sworn declaration by a former Jump employee turned SEC whistleblower that a co-founder of Jump, who wasn’t identified, played a part in the firm’s decision to restore TerraUSD’s peg to the US dollar in May 2021. Jump was founded in 1999 by Paul Gurinas and Bill Disomma, who met in the Deutsche Mark pit at the Chicago Mercantile Exchange.

The whistleblower had heard Jump’s co-founder say “he was willing for Jump to risk about US$200 million to help restore the peg,” according to the document. The whistleblower also claimed to have seen Jump’s co-founder direct traders “to adjust the parameters of the [Jump] trading models to control the price, quantity and timing of UST orders,” referring to TerraUSD.

Days after TerraUSD returned to its US$1 peg, the whistleblower recalled hearing Jump’s co-founder advising the Jump crypto team to “not cause another depeg by selling too quickly.” BLOOMBERG

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