A lawsuit filed in California federal court has accused Terraform Labs Pte. Ltd. (TFL), its leaders, and corporate relatives of making false and misleading statements ahead of the collapse of TFL’s popular U.S. dollar-pegged stablecoin in May, costing investors $40 billion.
Like another complaint filed against the crypto trading platform Binance over the collapse, the instant filing explains that TFL operates “the Terra blockchain and its related protocol, which hosts, supports, and funds a community of decentralized financial applications and products known collectively as the Terra ecosystem.” TFL’s primary focus is developing and selling a selection of digital assets and financial products, including “stablecoins,” a suite of financial products such as “mirrored assets,” bonded assets, liquidity pool tokens, along with various protocols to support and facilitate their sale, the complaint says.
It further details the marketing efforts made on part of TFL whereby it formed a coalition of six venture capital groups that promised to support and fund the Terra ecosystem and to “defend the peg” in the event that high volatility caused the TFL’s stable coin pair, UST/LUNA, to become untethered from one another. According to the complaint, the marketing efforts were so successful that $14 billion of UST’s market cap (75%) was deposited at its peak.
The crypto purchaser says that the Terra Token bears the hallmarks of an investment contract and, therefore, a security yet, TFL neither registered itself or the digital assets with the Securities and Exchange Commission (SEC). It notes that the SEC has opened an investigation into TFL and its co-founder and CEO, Do Kwon, whom the complaint says trash talks Terra Token critics by dismissing them as “poor.”
The filing explains that in early May 2022, “structural infirmities” in the Terra ecosystem exposed a crack in UST’s ability to maintain its peg to $1, unraveling the stability and sustainability of the UST/LUNA pair and the Anchor Protocol. Once investors found out, and within a week, the price of UST and LUNA cratered by more than 90%.
The lawsuit states claims for fraud under the federal securities laws against both the companies and the individual defendants. The plaintiff is represented by Scott+Scott Attorneys at Law LLP.