US court orders Terraform Labs’ chief to comply with SEC subpoenas

A US court has ordered the chief executive of collapsed stablecoin operator Terraform Labs to comply with subpoenas from the regulator seeking documents and materials related to the sale of potential unregistered securities.

The US court of appeals in New York on Wednesday upheld the claim from the Securities and Exchange Commission, which is seeking information on Mirror Protocol, a trading network built on the Terra ecosystem that offered customers tokens that closely mirrored the price of some of the US’s largest listed companies such as Apple and Amazon.

The regulator’s victory marks a further blow to Terraform Labs’ head Do Kwon, who is facing several legal cases in the wake of the sudden $40bn collapse of terraUSD, a stablecoin, and its accompanying token luna, which left investors out of pocket.

The 30-year-old South Korean was the chief developer of terraUSD, whose collapse last month sent shockwaves through the crypto industry. Mirror Protocol was also developed by Kwon’s Terraform Labs with the hope of bridging traditional finance with crypto.

The SEC’s interest in Mirror Protocol predates the collapse. Tokens on the platform are designed to represent — or “mirror” — the price of real-world stocks, and were intended to give international investors a means of accessing US equity markets.

The SEC served papers on Kwon at a high-profile industry conference in New York last September. At first, Kwon denied being served the subpoenas, and then he and Terraform Labs countersued the SEC.

Kwon and Terraform Labs argued that the SEC broke its own rules by failing to keep the subpoenas confidential, and also claimed the company did not have a significant business presence in the US.

“The subpoenas were served on Mr Kwon in public: Mr Kwon was approached by the process server as he exited an escalator at the Mainnet summit while on his way to make a scheduled presentation that was not about the Mirror Protocol,” according to court filings in the US District Court in New York.

The US court of appeals dismissed Terraform Labs’ claims, and pointed out it had employees in the US, including a director that had promoted the tokens in question.

“While seeking to enter into an agreement with a US-based company, [Terraform Labs and Kwon] indicated that 15 per cent of users of its Mirror Protocol are within the US”, said the court ruling.

At the same time, South Korean authorities are also deepening their investigations into Terraform Labs and Kwon.

Last month, the Seoul Southern District Prosecutors’ Office opened an investigation into complaints filed by Terraform Labs investors alleging the company and its founders “deceived investors with their flawed algorithmic coins”.

Police in Seoul are also investigating allegations that a Terraform Labs employee embezzled funds using the company’s bitcoin holdings. Kwon and South Korean prosecutors declined to comment on the SEC’s investigation.

Terraform Labs has launched a new blockchain, Terra 2.0, and an accompanying luna token since the collapse of the original. It is trading at around $3, having dropped more than 80 per cent from its starting price. The original luna is trading at less than a cent.

Additional reporting by Song Jung-a in Seoul