Do Kwon's Scheme Unraveled: He Misled Investors About the Stability of USTby@secagainsttheworld
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Do Kwon's Scheme Unraveled: He Misled Investors About the Stability of UST

by SEC vs. the WorldOctober 13th, 2023
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Do Kwon misled investors about the stability of UST and about the algorithm that pegged UST's price to the U.S. dollar.

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SEC v. Terraform Court Filing, retrieved on February 16, 2023, is part of HackerNoon’s Legal PDF Series. You can jump to any part in this filing here. This is part 29 of 38.

b. Terraform and Kwon Mislead Investors about the May 2021 De-peg

152. Terraform and Kwon also engaged in a scheme to mislead investors and potential investors about the stability of Terraform's stablecoin “UST" (including as offered and sold with the Anchor Protocol) and the algorithm that purportedly pegged UST's price to the U.S. dollar.

Specifically, in May 2021, when the value of UST became "unpegged" from the U.S. dollar, Terraform, through Kwon, secretly discussed plans with a third party, the "U.S. Trading Firm," to buy large amounts of UST to restore its value.

153. When UST's price went back up as a result of these efforts, Defendants falsely and misleadingly represented to the public that UST's algorithm had successfully re-pegged UST to the dollar, giving the investing public the false and misleading impression that the re-peg had occurred without human intervention and misleadingly omitting the real reason for the re-peg: intervention by the U.S. Trading Firm

154. Starting on or about November 2019, the U.S. Trading Firm and Terraform or its subsidiaries entered into a series of agreements (negotiated and signed by Kwon on behalf of Terraform), whereby the U.S. Trading Firm was to provide Terraform market-making services with respect to LUNA, and eventually UST, in exchange for compensation (generally by receiving LUNA at a significant discount to market prices). These agreements generally provided for the U.S. Trading Firm to receive LUNA after achieving certain benchmarks in its trading of UST.

155. From 2019, when UST was first coded onto the Terraform blockchain, until mid- May 2021, there were no significant market disruptions to UST.

156. But on May 19, 2021, UST began to de-peg from $1.00. On May 23, 2021, UST's price declined sharply, dropping to nearly $0.90. That morning and continuing throughout the day, Kwon communicated repeatedly with the U.S. Trading Firm. In these communications, Kwon expressed concern over UST's value and discussed with the U.S. Trading Firm how to restore UST's peg to the dollar.

157. The U.S. Trading Firm responded by purchasing large quantities of UST throughout the day on May 23 and continuing through May 27 in an effort to restore the peg. Ultimately, the U.S. Trading Firm made net purchases of over 62 million UST across at least two crypto asset trading platforms. As depicted in the chart below, UST's market price began to rise shortly after the U.S. Trading Firm's purchases, and eventually was restored to near $1.

158. Shortly thereafter, Kwon on behalf of Terraform agreed to remove the loan agreement conditions that required the U.S. Trading Firm to achieve the requisite benchmarks in order to receive the loaned LUNA tokens. Instead, Terraform agreed to deliver on specified dates, without conditions, specific amounts of the remaining 61,458,334 LUNA tokens to the U.S. Trading Firm under the agreements. Under the modified terms of the agreements, the final LUNA delivery to the U.S. Trading Firm was set to occur by September 1, 2025.

159. Those modifications were subsequently reduced to writing in a July 21, 2021 agreement signed by Kwon. Under the terms of the modified agreement, U.S. Trading Firm received LUNA tokens at $0.40 per token, even during periods when LUNA was trading at more than $90 in the secondary market.

160. The U.S. Trading Firm ultimately profited approximately $1.28 billion by selling LUNA acquired from Terraform under the terms of the 2019 and 2020 loan agreements, as modified.

161. Almost immediately upon UST's recovery in May 2021, Terraform and Kwon began to make materially misleading statements about how UST's peg to the dollar was restored. Specifically, Terraform and Kwon emphasized the purported effectiveness of the algorithm underlying UST in maintaining UST pegged to the dollar - misleadingly omitting the true cause of UST's re-peg: the deliberate intervention by the U.S. Trading Firm to restore the peg.

162. For instance, in May 23, 2021, Kwon posted a series of statements on his Twitter account @d0h0k1, including:

16/Is $UST growth manipulated by Terraform Labs?

Nobody who's used mirror or anchor could believe this - but just for clarification we currently hold only ~59M $UST.

Reminder that there's currently over 2B in UST stablecoins.


Building pure, unbiased and decentralized money is the long game...

163. Similarly, on May 24, 2021, Terraform tweeted the following from @terra_money:

Plagued by the cumbersome nature of stress-induced decision-making of human agents in time of market volatility, it's why central banks are exploring CBDCs. Algorithmic, calibrated adjustments of economic parameters are more effective than faxes and suits in meetings.

164. Kwon continued to make similar material misstatements over the course of the next year. For instance, during a March 1, 2022 Twitter talk show, Kwon talked about UST's de-peg in May 2021, stating:

... it took a few days for the slippage cost to naturally heal back to spot. So that's another feature of the market module where when the exchange rate has deviated from the peg, the protocol automatically self-heals the exchange rate back to whatever the spot price is being quoted by the oracle. So that's why it took several days for the peg to recover.

A transcript of that talk show was also posted to a publicly available website located at, which was funded by Kwon.

165. These statements were materially false and misleading. Despite Defendants' statements to the contrary, UST did not "automatically self-heal[]." UST's “[a]lgorithmic, calibrated adjustments of economic parameters" failed. UST's peg to the dollar was not restored until after Defendants took deliberate steps to discuss with the U.S. Trading Firm a plan to deploy capital to restore UST's price to one dollar.

While Defendants led investors to believe UST's peg was restored by the algorithm, in fact, as Defendants knew, it was the deliberate actions of "human agents," including Terraform, Kwon, and the U.S. Trading Firm, that ultimately led to the restoration of the peg.

166. And Terraform and Kwon knew or were reckless in not knowing that these statements were materially false and misleading. Terraform and Kwon knew that the U.S. Trading Firm had intervened to buy up UST because Terraform and Kwon discussed it with the U.S. Trading Firm at the time. In fact, the U.S. Trading Firm was rewarded for its role in restoring the peg by having the terms of its loan agreements modified to the U.S. Trading Firm's benefit.

167. Defendants never disclosed their or U.S. Trading Firm's roles in restoring UST's peg. Instead, they misled investors who were actively buying and trading UST to believe that the algorithm had "self-heal[ed]" to restore the peg without any human involvement.

168. Terraform and Kwon's misrepresentations and omissions about the May 2021 de- peg were material to numerous U.S.-based retail and institutional investors who were unaware that any third party had intervened to restore the peg and continued to buy and hold UST (including as offered and sold with Anchor Protocol) on the belief that the algorithm had worked to restore the peg.

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This court case 1:23-cv-01346 retrieved on September 12, 2023, from is part of the public domain. The court-created documents are works of the federal government, and under copyright law, are automatically placed in the public domain and may be shared without legal restriction.