This Friday, a class action lawsuit was filed in a Californian court against Do Kwon, Terraform Labs and Three Arrows Capital among others. What these actors are accused of is the misleading promotion and sale of unregistered assets, among others through the LUNA token.
Do Kwon is being sued
This Friday, a California court received a class action lawsuit, targeting Do Kwon. This complaint also involves several entities such as Terraform Labs and cryptocurrency investment funds Three Arrows Capital or Jump Crypto in particular.
The lawsuit alleges the sale of unregistered securities to US investors by the Securities and Exchange Commission (SEC), as well as misleading communications about the entire Terra (LUNA) ecosystem:
“In addition to selling unregistered securities…the defendants made a series of false and misleading statements about the largest digital assets in the ecosystem…UST and LUNA, in order to induce investors to purchase these digital assets at inflated rates. “
The inflated rates referred to are in reference to the Anchor Protocol (ANC). The qualification of an asset as a financial security falls under the Howey test. Thus, the arguments raised on this subject are the same as those against Binance.US on the UST.
Several reasons are given by the plaintiffs’ collective to justify the choice of a Californian court. For example, Do Kwon studied at Stanford. But above all, Terraform Labs has received financing from numerous investment funds based in California, such as Coinbase Ventures, Pantera Capital and Blockchain.com Ventures.
The same reasoning is developed for Anchor, the main protocol that made up the ecosystem. This one counted, among others, Alameda Reaserch among its investors. These elements justify, according to the plaintiffs, the Californian roots of Terraform Labs.
Communication deemed misleading
The collective makes several points about the alleged misleading communication between the parties. The case of the defunct Basis Cash (BAC), a previous algorithmic stablecoin project developed by Do Kwon, is mentioned. It is believed that the founder of Terra was aware of the risks of UST, which is also algorithmic. And these risks were not highlighted in the defendants’ communication.
The argument also highlights Do Kwon’s behaviour. For example, he is accused of belittling investors who question his business model in order to hide the flaws in his product. An exchange of tweets with a trader, answering to the pseudo Algod, is highlighted to illustrate this point.
On 9 March, the trader called LUNA a Ponzi scheme and assured that if the asset broke its ATH, he would short it with big money. To which Do Kwon replied that his resources were not enough:
Even after the typo i made i will still frame this pic.twitter.com/EB9jU6W3Oq
– Algod (@AlgodTrading) May 10, 2022
There is an interesting fact about the relationship between the two people. In the week following this exchange, they made a million dollar bet on the LUNA prize on March 14, 2023. Whether it will be higher or lower than $88. While we already know the outcome of the bet, we don’t know whether Do Kwon kept or will keep his word.
This 72-page complaint is thus defended by various more or less convincing examples. The aim here is to encourage the courts to act against Do Kwon and the various defendants.
As in the case of Binance.US, it is not certain that this procedure will lead to sanctions. However, it is certain that this is just one episode in a larger court case.
