he SEC rested its case against Do Kwon and Terraform Labs on April 5th, 2024 after presenting evidence they argued showed the defendants had misled everyday investors. Key to their allegations was the claim that Kwon and Terraform implied the terraUSD (UST) stablecoin's peg to the US dollar was maintained through an "algorithm" that allowed for automatic healing in depeg situations. However, SEC attorney Laura Meehan stated there was no self-healing mechanism - the peg relied on continuous trading activity and intervention when needed.
Meehan also revealed the SEC's belief that in May 2021, when UST briefly lost its peg, Kwon and Terraform had secretly worked with trading firm Jump to buy millions of dollars worth of UST off-chain and restore the $1 price through their market-making efforts. The SEC argued Kwon intentionally kept this involvement quiet to portray the re-pegging as evidence of the success of the "algorithm".
The Defense Raises Doubts
In his closing statement, Terraform's attorney Louis Pellegrino acknowledged the terraUSD mechanics did require minting and burning by market participants like Jump to maintain the peg. However, he stated the defendants had never claimed the system was fully autonomous. Pellegrino also emphasized that all investors knew trading activity was necessary to keep UST at $1, and documents from firms like Galaxy Digital had spelled out the risks of a collapse.
Regarding the 2021 de-pegging, Pellegrino said Jump did have a formal agreement to provide liquidity, not a secret bailout. He posited that reasonable buyers knew the risks involved. When UST did collapse in May 2022, the defense blamed short-selling hedge funds for deliberately attacking the protocol. Pellegrino argued Terraform had always aimed to improve the situation for users post-crash.
The Jury Must Decide
With closing arguments complete, the jury in New York must now decide whether the SEC has proven Do Kwon and Terraform Labs misled buyers of UST and LUNA as to the true nature of the stablecoin's peg and the company's activities. Both sides presented competing narratives - the SEC portraying a years-long deception, the defense claiming all parties understood the risks. The deliberations will help determine if Kwon and his firm are found liable for civil securities fraud charges. As the case continues, Do Kwon remains under house arrest in Montenegro fighting extradition to the US or South Korea to face potential criminal charges as well.
