Jury Finds Terraform Labs and Do Kwon Liable for Civil Fraud

A federal jury in Manhattan found Terraform Labs PTE Ltd. and founder Do Hyeong Kwon liable for defrauding investors in crypto-asset securities on April 5, 2024. The civil verdict followed a nine-day trial in the U.S. District Court for the Southern District of New York.

The jurors accepted the Securities and Exchange Commission’s central allegations that Terraform and Kwon misled investors about two foundations of the Terra ecosystem: the ability of TerraUSD, commonly identified by the ticker UST, to maintain its intended $1 value, and whether the Korean Chai payments application used Terraform’s blockchain to process and settle transactions.

The verdict mattered beyond one failed token project. Terra’s May 2022 collapse had exposed the fragility of a dollar-linked asset whose stability depended on its economic relationship with LUNA rather than a conventional reserve of dollars or equivalent assets. The case placed representations about that system—not merely the mechanism’s ultimate failure—before a federal jury.

Two disputed representations

The SEC’s first theory concerned an earlier loss of UST’s dollar peg in May 2021. The regulator alleged that Terraform secretly arranged for a third party to make large UST purchases that helped restore the price. According to the SEC, Kwon subsequently attributed the recovery to the reliability of the protocol’s algorithm, creating a misleading impression that the system had corrected itself without outside intervention.

The second theory concerned Chai. Terraform promoted the Korean payments application as evidence that its blockchain had a practical commercial use. The SEC argued that Chai transactions were not processed and settled on the Terraform blockchain as investors had been led to believe. The jury’s verdict resolved the civil fraud claims against Terraform and Kwon in the SEC’s favor.

Terraform said after the verdict that it was disappointed, disputed the SEC’s authority to bring the case and was considering its options. Kwon’s lawyer declined to comment to Reuters. Those responses were contemporaneous positions, not findings that displaced the verdict.

What the jury did—and did not—decide

The April 5 decision addressed civil liability, not criminal guilt or punishment. U.S. District Judge Jed Rakoff still had to determine remedies after receiving submissions from the SEC and the defendants. No civil penalty, disgorgement amount, operating restriction or investor distribution was fixed by the verdict itself.

The case had already reached one important legal conclusion before trial. On December 28, 2023, Rakoff granted the SEC summary judgment on its claim that Terraform and Kwon had offered and sold LUNA and MIR in unregistered transactions. He left disputed fraud questions involving UST’s stability and Chai for the jury. The April 5 verdict therefore added fraud liability to an existing registration ruling; it was not a general judicial declaration that every stablecoin or blockchain token was a security.

Kwon did not attend the trial. Reuters reported that he remained in Montenegro following his March 2023 arrest, while the United States and South Korea were pursuing separate extradition requests connected to criminal cases. Those proceedings were distinct from the SEC’s civil action and remained unresolved on April 5.

Market scale and limitations

The SEC’s February 2023 complaint said the alleged scheme ran from at least April 2018 through May 2022 and caused the loss of at least $40 billion in market value. Reuters described the regulator’s estimate as more than $40 billion in investor losses involving UST and LUNA when the peg failed in May 2022.

That figure establishes the scale asserted by the regulator, but it is not a Coinburn reconstruction of transaction-level losses. Token market value depends on circulating supply and observable prices across fragmented venues; it does not equal cash invested, losses realized by every holder or funds available for recovery. This reconstruction therefore makes no claim about an April 5 token-price reaction, trading return or causal market move.

The defensible event-day conclusion was narrower and substantial: a federal jury found that Terraform and Kwon’s representations about UST and Chai crossed from disputed promotion into actionable civil fraud.