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Terraform Labs co-founder arrested and charged with fraud

Bloomberg
Bloomberg • 5 min read
Terraform Labs co-founder arrested and charged with fraud
Do Kwon was charged with fraud. Photo: Bloomberg
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Terraform Labs co-founder Do Kwon was charged by US prosecutors with orchestrating a yearslong cryptocurrency fraud that wiped out at least US$40 billion ($53.1 billion) in market value.

His indictment on Mar 23 evening by the US attorney’s office in Manhattan capped a dramatic day that began with the news that Kwon, already a fugitive from charges in his native South Korea, had been arrested in Montenegro. It’s unclear if the arrest was at the request of US authorities, but federal prosecutors said they would seek his extradition to New York.

Mark Califano, a US lawyer for Kwon, didn’t immediately respond to a request for comment.

If he is sent to New York, the 31-year-old Kwon will be facing prosecution by the same office overseeing a criminal case against another major figure in the crypto world, FTX co-founder Sam Bankman-Fried, who was himself extradited from the Bahamas. Manhattan US Attorney Damian Williams has been vocal that crypto firms’ efforts to avoid regulation by basing themselves overseas would not deter his prosecutors.

“Web3 is not a law-free zone,” Williams said last July, adding, “Fraud is fraud is fraud, whether it occurs on the blockchain or on Wall Street.”

Kwon Fallout

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The collapse of Singapore-based Terraform’s TerraUSD stablecoin shook the crypto world last spring. Meant to keep a constant value of US$1 via a complex mix of algorithms and trader incentives involving its free-floating sister token Luna, Terra was designed as a refuge from the volatility of other cryptocurrencies. But both Luna and Terra unraveled when confidence in Kwon’s project evaporated during a few chaotic days in early May.

The token’s implosion rippled across the crypto sector and played a role in the failures of firms like Three Arrows Capital, Voyager Digital, and, most prominently, FTX and its affiliated trading firm, Alameda Research.

According to the US indictment, Kwon allegedly deceived investors about aspects of the Terra blockchain, including its technology and the extent to which it had been adopted by users.

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The indictment cites false and misleading statements Kwon made in a television interview and on social media about the alleged scheme. Prosecutors also accuse Kwon of misleading purchasers of cryptocurrencies issued by Terraform, including Luna and the stablecoin.

Another count in the indictment accuses Kwon of engaging in market manipulation with an unidentified US trading firm to alter the market price of TerraUSD. In May, 2021, prosecutors allege, Kwon agreed to modify an existing loan between Terraform labs and the firm to compensate the firm for altering the market price of the stablecoin.

Market Manipulation

Bloomberg News reported earlier this month that Manhattan federal prosecutors were investigating chat group conversations among trading firms about a potential TerraUSD bailout for possible market manipulation. Those firms included Jump Trading Group, Jane Street Group and now-bankrupt Alameda. The bailout never took place.

Kwon was arrested in Podgorica, Montenegro, early on Mar 23, along with Han Chang Joon, Terraform’s chief financial officer, for trying to fly to Dubai using falsified Costa Rican traveling documents, the Balkan nation’s Interior Ministry said in a statement.

Kwon’s whereabouts have been the source of constant speculation since September 2022, when South Korean authorities issued a warrant for his arrest on allegations including breaches of capital-markets law. He was subsequently stripped of his passport and subject to an Interpol red notice, though it’s unclear if that was the basis for his arrest.

South Korea’s police force said Friday that it had asked Montenegro to extradite Kwon to the Asian nation. Both countries fall under the European Convention on Extradition, South Korea’s Justice Ministry said.

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False Papers

Kwon and Han were also found with Belgian and South Korean travel documents, the ministry said. The Belgian papers were falsified, according to Interpol. Police took three laptops and five mobile phones from the pair, the ministry said.

Hours later, a grand jury in Manhattan charged Kwon with an eight-count indictment, including securities fraud, commodities fraud and conspiracy.

The US criminal charges come a month after the Securities and Exchange Commission sued Kwon, accusing him and Terraform of offering and selling unregistered securities.

Michael Zweiback, a Los Angeles-based lawyer specialising in extradition cases, said the country that first files charges usually has priority in prosecutions when fugitives are apprehended.

Possible deal?

Zweiback said he suspects the US authorities only acted after reaching a deal with their South Korean counterparts that would see Kwon prosecuted in New York first.

According to Zweiback, the US has a stronger ability to seize assets and property in criminal cases and could share the proceeds with South Korea. The lawyer said such deals between nations are fairly common.

Extradition fights can often drag for years, and it was initially feared that Bankman-Fried would resist returning to the US to face charges. He ultimately decided to do so and is currently free on a $250 million bail package.

Kwon may try to fight extradition, but he has no apparent ties to Montenegro, which Zweiback said could revoke his status and kick him out of the country.

“And the first one that picks him up wins,” Zweiback said of the competing prosecutions.

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