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Federal Judge Grants Confidential Submission of Documents in SEC's Lawsuit Against Terraform Labs

The case involves allegations of price manipulation of TerraUSD and a multi-billion dollar crypto asset securities fraud.

Image: chriss/Flickr (creative commons)

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In a recent development in the ongoing lawsuit by the U.S. Securities and Exchange Commission (SEC) against Terraform Labs and its CEO Do Kwon, a federal judge has permitted Jump Crypto to submit certain documents confidentially during the case's discovery phase, The Block reported on Tuesday.

This ruling, delivered by Federal Judge Jed Rakoff, allows Jump Crypto, a trading firm accused of manipulating the stablecoin TerraUSD (UST), to provide sensitive materials without public disclosure, although the court retains the option to overturn this decision for specific documents.

The SEC's allegations revolve around Jump Crypto's involvement in a scheme that reportedly netted the firm a $1.28 billion profit by manipulating UST's price. According to the SEC, Terraform Labs loaned Jump Crypto significant amounts of Terra (LUNA) tokens in 2019 and 2020 under the guise of improving liquidity. However, the SEC claims these tokens were sold continuously in the market, undermining the stability of UST.

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The lawsuit further contends that in May 2021, as TerraUSD lost its peg to the US dollar, Jump Crypto purchased a large quantity of the stablecoin in an attempt to stabilize its value. The SEC accuses the defendants of misleadingly representing to the public that UST's algorithm had successfully re-pegged UST to the dollar without external intervention.

Filed in February this year, the SEC's complaint alleges that Kwon orchestrated a multi-billion dollar crypto asset securities fraud spanning from April 2018 to May 2022. It claims that Kwon and Terraform Labs deceived investors, making false assertions about the utilization of the Terraform blockchain by the Korean mobile payment processor Chai.

As the legal proceedings continue, jury selection for the trial is set for January 29, 2024, in downtown Manhattan. Both the SEC and Terraform Labs have requested a summary judgment, potentially allowing for a resolution outside of trial. In July 2023, Rakoff rejected a motion by Kwon and Terra to dismiss the case, citing sufficient evidence of the use of false and materially misleading statements to entice US investors.

In addition to the civil suit, Kwon faces criminal charges in the US related to the collapse of the Terraform ecosystem. He is presently serving a four-month sentence in Montenegro for alleged document forgery, with pending extradition decisions to either the U.S. or South Korea.