(Bloomberg) -- Terraform Labs Pte. and co-founder Do Kwon were found liable for fraud in a US government lawsuit over the firm’s 2022 collapse, which wiped out $40 billion in investor assets and shook the cryptocurrency world.

After a two-week trial in New York, a jury on Friday found Kwon and Terraform misled investors, handing the US Securities and Exchange Commission a boost in its efforts to assert greater control over the crypto industry. The verdict also could be a preview of pending criminal cases against Kwon in the US and South Korea, though the criminal standard for guilt is higher.  

Kwon, who owns 92% of Terraform, was arrested in Montenegro a year ago and convicted of attempting to travel using a fake passport. Authorities there are considering whether to extradite him to the US or to his native South Korea — he faces criminal fraud charges in both countries. He may end up on trial in New York now that the Balkan nation’s Supreme Court has overturned earlier decisions including those to hand him over to Seoul.  

Read More: Do Kwon May Be Extradited to US After Montenegrin Top Court Acts

The seven-person Manhattan jury deliberated for less than two hours before finding that Kwon and Terraform falsely claimed that Chai, a popular Korean payment application, used Terraform’s blockchain technology to make transactions. The jurors also found that investors were misled about the stability of the UST stablecoin, which Kwon and Terraform claimed was algorithmically pegged to the US dollar.

“For all of crypto’s promises, the lack of registration and compliance have very real consequences for real people,” Gurbir Grewal, the SEC’s enforcement director, said in a statement. “As the hard work of our team shows, we will continue to use the tools at our disposal to protect the investing public, but it is high time for the crypto markets to come into compliance.”

The SEC asked the jury only for a finding of liability. It will ask the judge to award civil penalties as well as the payment of ill-gotten gains and prejudgment interest.

“We are very disappointed with the verdict, which we do not believe is supported by the evidence,” a spokesperson for Terraform Labs said in a statement. “We continue to maintain that the SEC does not have the legal authority to bring this case at all, and we are carefully weighing our options and next steps.”

The trial was the latest high-profile courtroom battle between the US government and some big names in the crypto industry. Last month, a judge in the same Manhattan federal courthouse sentenced Sam Bankman-Fried to 25 years in prison for orchestrating a massive fraud at his FTX crypto exchange. Evidence in Bankman-Fried’s trial showed UST’s collapse contributed to the failure of FTX.

The legal challenges in Montenegro led to an unusual situation for SEC enforcers, who went to trial with their civil fraud claims before the criminal case against the same defendant was resolved. Usually prosecutors are the first to take their case before a jury.

Unregistered Securities

US District Judge Jed Rakoff ruled in December that Terraform is liable for selling unregistered securities, agreeing with the SEC on a key element of its case and removing it from the issues the jury had to consider. Terraform has said its cryptocurrencies don’t constitute securities under the law and that the SEC lacks jurisdiction. The company said it will appeal the ruling.

“Terra was a fraud, a house of cards,” SEC lawyer Devon Staren told the jury at the start of the trial. “And when it collapsed, investors lost nearly everything.”

Terraform filed for Chapter 11 bankruptcy protection in January, claiming it couldn’t pay the penalties sought by federal regulators. 

Jurors heard testimony from Chai’s former head product executive, who supported the SEC’s argument that Terraform made misleading statements about the payment application’s use of its technology. They heard from alleged whistleblowers and expert witnesses refuting Terraform claims about Chai.

The SEC also presented evidence that Jump Crypto put money into UST to defend its dollar peg, undercutting Terraform claims that the peg didn’t require outside intervention.

The civil case is US v. Terraform Labs, 23-cv-01346, US District Court, Southern District of New York (Manhattan).

(Updates with SEC statement.)

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