In the SEC’s big jury trial win against Terraform Labs PTE Ltd. and its former CEO, Do Kwon, the jury found that false or misleading statements were reckless or intentional, happened "in the offer or sale" of crypto tokens, and were distributed via the mails or an instrumentality of interstate commerce. The jury’s findings provide a look at what fact-finders might find in similar crypto enforcement actions (SEC v. Terraform Pte. Ltd.).
The jury’s verdict was delivered April 5 after a nine-day trial in federal district court in the Southern District of New York.
In a statement, SEC Division of Enforcement Director Gurbir S. Grewal highlighted the consequences of lack of registration and compliance.
“Through these deceptions, the defendants caused devastating losses for investors and wiped out tens of billions of market value nearly overnight,” said Grewal. “[I]t is high time for the crypto markets to come into compliance.”
Tokens as securities. As a threshold matter, the court instructed the jury as a matter of law that the tokens issued by Terraform (UST, LUNA, and wLUNA) are securities. The court ruled last December that the tokens are securities and investment contracts under Howey.
Fraud schemes. The court explained the two alleged fraudulent schemes.
First, the SEC alleged that the defendants falsely conveyed to investors that if the price of UST fell below $1.00 (known as the "peg"), it would correct to $1.00 through the operation of a Terraform algorithm, when in fact, when the price of a UST token fell below $1.00 in May 2021, the defendants secretly agreed with a company called Jump to have Jump make large undetectable purchases of UST to return the price to $1.00.
Second, the defendants deceived investors into believing that a company called Chai used Terraform's blockchain, when in fact the Chai transactions were simply copied onto Terraform systems to make it appear as though Chai was using Terraform's blockchain.
Terraform Labs and Do Kwon denied the allegations.
Jury instructions. The court instructed the jury on statutory requirements. Under Section 17 of the Securities Act, the jury was required to find:
- That the defendant, in the offer or sale of UST, LUNA, or wLUNA, made at least one false or misleading statement or misleading conduct regarding a material matter for the purpose of obtaining money or property;
- That the defendant acted intentionally, recklessly, or negligently;
- That the defendant caused to be used the mails or an instrumentality of interstate commerce. For example, the telephone, Internet, email or any other electronic communication, or any interstate or international delivery system.
In considering “offer or sale,” the jury was instructed that it could consider whether the statements were made to urge investors to invest in Terraform securities. No actual investment was required, and the SEC was also not required to prove that any investor actually relied on any false or misleading statement or conduct.
Regarding Section 10b-5 under the Exchange Act, the court noted that on the facts of this case, there was only one difference from Section 17: a 10b-5 claim requires proof of fraudulent intent or recklessness and cannot rest on negligence.
Witnesses take the Fifth. The court also instructed the jury regarding witnesses Jeffrey Kuan, former head of business development for Terraform, Kanav Kariya, the president of Jump Crypto, and William DiSomma, a co-founder of Jump Crypto—who declined to answer certain questions on the grounds of their Fifth Amendment privilege against self-incrimination.
The court explained that in civil cases, a jury may draw the inference that the withheld information would have been unfavorable to one or more defendants.
Jury verdict. In finding liability on the Section 17 claim, the jury decided that Terraform acted recklessly and Do Kwon acted intentionally.
The jury also found the defendants liable on the Section 10b-5 claim.
Finally, the jury found control person liability for Do Kwon.
This is case No. 1:23-cv-01346-JSR.