Both the SEC and the defense request a summary judgment in lawsuit against Terraform Labs and Do Kwon
With justice served for one of the “crypto villains” of 2022 – Sam Bankman-Fried – the Securities and Exchange Commission (SEC) is looking to speed up the process for the other major villain of 2022, Terraform Labs founder Do Kwon.
In May 2022, the $45 billion Terra ecosystem collapsed after its TerraUSD (UST) algorithmic stablecoin lost its U.S. dollar peg. In February, the SEC filed a lawsuit against Terraform Labs and Do Kwon, charging them with securities fraud.
According to a document filed with the courts on Oct. 27, the SEC has asked the judge presiding over the case to make a summary judgment on the claims without a full trial.
“Terraform and Kwon orchestrated a fraudulent scheme that ultimately led to $45 billion in market loss, including devastating losses for U.S. investors,” the filing said. “Defendants fabricated Terra blockchain activity to create the appearance of real-world transactions on the blockchain that did not exist. And they lied to investors about the stability of Terraform’s so-called stablecoin, while concealing the secret deal Defendants had entered into with a third party to save the asset from collapse. When this scheme unraveled, investors in Terraform’s crypto asset securities lost nearly everything.”
“In addition to defrauding investors, Defendants engaged in unregistered public offerings of certain of their crypto-asset securities,” the SEC added. “Defendants distributed LUNA and MIR to intermediaries that were expected to, and did, resell those securities into public trading markets accessible to investors in the U.S.”
“As set forth below and in the SEC’s Statement of Undisputed Material Facts Pursuant to Local Civil Rule 56.1, the evidence that establishes Defendants’ violations is clear, undisputed, and overwhelming,” they said. “The Court should grant summary judgment in the SEC’s favor.”
The filing included more than 45 pages outlining the evidence and arguments against Terraform Labs and Kwon as the SEC made its case for summary judgment.
“Summary judgment is appropriate when the record shows that there is no genuine dispute as to any material fact and that the moving party is entitled to judgment as a matter of law,” the SEC said, citing Case v. City of New York. “If the moving party meets its initial burden, the burden then shifts to the opposing party to establish a genuine dispute of material fact.”
The SEC presented evidence showing that “Terraform repeatedly violated the Exchange Act” by making “numerous material misrepresentations in statements to investors and potential investors” regarding the depeg of the stablecoin TerraUSD, “and engaged in other deceptive conduct, including causing ‘fake transactions’ to be put on the Terra blockchain.”
“Second, the undisputed record shows that Kwon – as the founder, CEO, and majority shareholder of 92% of Terraform – had the ‘power to direct or cause the direction of the management and policies of’ Terraform,” they said. “Kwon admitted that he had ultimate authority for decisions at Terraform.”
“Third, Kwon was a culpable participant in Terraform’s deceptive conduct and misrepresentations,” they alleged. “In fact, he was the genesis of that conduct and he repeatedly used Terraform to advance his schemes. Kwon conceived and directed the plan to ‘fake transactions’ on Terraform’s blockchain and then falsely represented them as real.”
“Kwon personally negotiated the deal with [redacted] in May 2021 to restore the peg, and then misrepresented to the public that the algorithm had ‘automatically self-heal[ed]’ the peg,” they said. “At the same time, Kwon directed Terraform employees to omit that information from public statements.”
“No rational jury could conclude that Kwon was not liable for Terraform’s violations of Exchange Act Section 10(b) and Rule 10b-5 thereunder pursuant to Exchange Act Section 20(a),” the SEC argued. “For the foregoing reasons, summary judgment is warranted against Defendants Terraform and Kwon on all of the SEC’s claims.”
The Kwon Identity: Fugitive Terraform Labs founder Do Kwon arrested using fake papers in Montenegro
In an opposing filing from Kwon’s defense team, his lawyers also asked for a summary judgment on the case, arguing that the judge should reject the SEC’s lawsuit, claiming it has failed to prove he or his firm did anything wrong.
“After two years of investigation, the completion of a discovery period that resulted in the taking of more than 20 depositions, and the exchange of over two million pages of documents and data, the SEC is evidentiarily no closer to proving that the Defendants did anything wrong,” the lawyers wrote.
“Indeed, with the close of fact and expert discovery, the deficiencies in the SEC’s case have gotten worse, as it is now apparent that admissible evidence does not exist to support many of the SEC’s claims and that the SEC knew some of its allegations were false when it filed the Amended Complaint,” they said. “It is evident that the SEC’s preferred witnesses have trafficked in rumor and innuendo about the Defendants, but few, if any, have any firsthand knowledge about anything relevant to this case.”
Kwon’s lawyers provided 35 pages of arguments backing their motion for a summary judgment, and concluded that, “For all the foregoing reasons, the Court should grant summary judgment in its entirety with prejudice.”
Both motions for summary judgment are now in the hands of the presiding judge and will be ruled on in the near future. Kwon is currently detained in Montenegro and has previously asked the court to reject the SEC’s motion to extradite and interview him in the United States.
By
Jordan Finneseth
For Kitco News
Tim Moseley