SEC Charges Jump Trading $123 Million for TerraUSD and Luna Misconduct

• A former Terraform Labs ally Tai Mo Shan has agreed to pay $123 million to settle the US SEC.
• The firm, linked to Jump Crypto, deceived investors about LUNA and UST’s functionalities.

The US Securities and Exchange Commission (SEC) recently beamed its regulatory antenna on Jump Crypto’s subsidiary Tai Mo Shan Limited. The Commission has asked Tai Mo Shan to pay a $123 million fine for its role in the Terra USD and LUNA misconduct.

The SEC’s Charges Against Tai Mo Shan

According to a press release, the SEC accused Tai Mo Shan of misleading investors about the stability of Terra USD, an alleged “algorithmic stablecoin” issued by Terraform Labs. Tai Mo Shan is further charged with selling securities in unregistered transactions. 

The SEC accused Tai Mo Shan of collaborating with Terraform to stabilize TerraUSD when it dropped below its $1 peg. For context, Terraform introduced TerraUSD as a stablecoin that maintained a $1 value via a web of mixed algorithms and trader incentives using LUNA. 

However, UST devalued from its $1 peg in May 2021 following a network strain. According to the SEC, Tai Mo Shan entered an agreement with Terraform Labs to purchase over $20 million worth of UST to restore the coin to its $1 peg.

The SEC accused Tai Mo Shan of trading UST deceitfully to trick investors into believing Terraform’s algorithmic mechanism was working. However, Tai Mo Shan’s large UST purchases played a huge role in the stability of the stablecoin. 

Additionally, the SEC determined that the firm functioned as a statutory underwriter in part of its offers and sales of LUNA, which Terraform sold as a security. The SEC accused Tai Mo Shan of purchasing some LUNA coins from Terraform with an eye toward distribution into the US market. 

Tai Mo Shan has not admitted or denied the SEC’s findings. However, the firm consented to pay a $36,726,378 civil penalty, $12,916,153 in prejudgment interest, and $73,452,756 in disgorgement as part of the settlement.

Gary Gensler’s Comment and Jump Crypto’s Role in TerraUSD Collapse

SEC Chair Gary Gensler said in a remark, “This case reminds us that, too many times in the crypto markets, we’ve seen significant investor losses due to fraud.” 

He further stressed that the crypto market participants should comply with the securities laws where applicable and not deceive the public.

Meanwhile, the SEC’s court filing revealed Jump Crypto had a deal with Terraform Labs to support TerraUSD and made up to $1 billion in profit. Per a CNF report, a federal district court found Terraform and its founder, Do Kwon, liable for fraud and unregistered securities offerings.

Subsequently, Terraform Labs consented to pay $4.5 billion to resolve the lawsuit brought by the SEC regarding its failure. Terraform’s collapse rocked the crypto industry, wiping over $40 billion in investor assets and equity.

Following a recent bankruptcy hearing, Terraform Labs has received court approval to wind down its operations, per a CNF update.