Kwon extradited from Montenegro to the U.S., facing criminal charges.

Author: Luc Cohen

Translation: Deep Tide TechFlow

Introduction

Do Kwon, co-founder of Terraform Labs, is facing serious legal challenges due to his role in the collapse of TerraUSD in 2022. On December 31 (according to Bloomberg), the Prime Minister of Montenegro announced that the extradition process for Terraform Labs co-founder Do Kwon to the U.S. has been completed. The U.S. Securities and Exchange Commission (SEC) has filed multiple fraud charges against him, including securities fraud and money laundering. What is the progress of the hearings, and how will the case develop?

Deep Tide TechFlow translates this article to follow the latest developments in Kwon's hearings after extradition and the progress of the case.

Police escort Terraform Labs co-founder Do Kwon in Podgorica, Montenegro. He was transferred after serving time for forgery on March 23, 2024.

Main Text

Summary

• Kwon extradited from Montenegro to the U.S., facing criminal charges

• Prosecutors accuse Kwon of misleading investors in the TerraUSD project

• Following the market crash in 2022, several cryptocurrency giants have been prosecuted

South Korean cryptocurrency entrepreneur Do Kwon is the developer of the digital currencies TerraUSD and Luna. These two currencies caused investor losses of up to approximately $40 billion during the market crash in 2022. This week, Kwon was extradited from Montenegro to the U.S. and pleaded not guilty to criminal fraud charges in court on Thursday.

The Manhattan federal prosecutor publicly released an indictment containing nine charges against Kwon, the co-founder of Terraform Labs and developer of TerraUSD and Luna, accusing him of securities fraud, wire fraud, commodity fraud, and conspiracy to commit money laundering. These charges are directly related to the collapse of TerraUSD and Luna.

Kwon appeared in Manhattan federal court on Thursday, dressed in an olive green long-sleeve shirt and black sweatpants. During the hearing, his lawyer Andrew Chesley entered a not guilty plea on his behalf. U.S. District Judge Robert Lehrburger ordered Kwon to remain in custody, as his lawyer indicated they would not seek bail at this time. After the hearing, Kwon received a 79-page indictment and left the courtroom escorted by U.S. marshals. He is expected to appear in court again on January 8.

In fact, as early as June of last year, Kwon reached a settlement with the SEC in a civil case related to the collapse of TerraUSD and Luna, amounting to $4.55 billion. As part of the agreement, he agreed to pay a $80 million fine and was banned from participating in any cryptocurrency trading. However, this did not prevent him from facing charges in the criminal case.

According to the indictment released on Thursday, Manhattan prosecutors accused Kwon of misleading investors during the promotion of TerraUSD in 2021. TerraUSD is a cryptocurrency known as a "stablecoin," designed to maintain a value of $1.

The indictment states that when TerraUSD fell below $1 in May 2021, Kwon claimed that an algorithm called "Terra Protocol" restored its value. However, he secretly arranged for a high-frequency trading firm to purchase millions of dollars' worth of tokens to artificially inflate the price.

Prosecutors pointed out that Kwon's false statements attracted a large number of retail and institutional investors to buy Terraform's products, which directly drove up the price of the Luna token, closely associated with TerraUSD. Luna is a highly volatile cryptocurrency, with a market cap that once reached $50 billion in the spring of 2022.

The indictment reads: "This growth largely relied on Kwon's blatant fraudulent conduct regarding Terraform and its technology."

However, when the value of TerraUSD plummeted again in May 2022, an unnamed trading firm warned that "this time stabilizing its price would not be easy."

Ultimately, both TerraUSD and Luna collapsed that month. This event not only caused significant declines in the prices of other cryptocurrencies (such as Bitcoin) but also triggered severe turmoil in the entire cryptocurrency market.

Although prosecutors did not disclose the name of the trading firm, the SEC noted in its civil case that Jump Trading had helped stabilize the price of TerraUSD in May 2021. Jump Trading has not yet responded to this.

Montenegro Detention Incident

In the SEC's lawsuit against Terraform, a Manhattan federal jury found Kwon and Terraform responsible for defrauding cryptocurrency investors last April.

Terraform's lawyers argued in their closing statements that the company and Kwon had always disclosed the nature of their products and how they operated, even if those products ultimately failed.

However, Kwon did not attend that trial, as he had been detained in Montenegro since March 2023 on forgery charges. He was transferred to U.S. authorities at the airport in Podgorica, the capital of Montenegro, on Tuesday.

Terraform had declared bankruptcy as early as January of last year.

Kwon is one of several cryptocurrency giants facing federal charges for alleged wrongdoing following the 2022 cryptocurrency market crash. That market crisis not only led to the collapse of multiple companies but also had a profound impact on the entire industry.

For example, FTX exchange founder Sam Bankman-Fried was convicted last March for misappropriating customer funds amounting to $8 billion and was sentenced to 25 years in prison. He is currently appealing this conviction.

Additionally, Alex Mashinsky, founder and former CEO of the cryptocurrency lending platform Celsius Network, admitted to two counts of fraud last month.

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