Jump Trading sued over Do Kwon’s alleged Terraform crypto fraud

The firm first got involved with South Korean Terraform co-founder and CEO Do Kwon in 2019 and is accused in the lawsuit, filed in federal court in Chicago and seeking class-action status on behalf of investors in Terraform’s tokens, of helping engineer a rescue in May 2021 of Terraform’s TerraUSD stablecoin (UST) and then helping to hide that fact from future investors. Read the lawsuit below.

Jump effectively propped up UST when intense selling reduced its value well below the $1 level to which it was meant to be pegged, according to the lawsuit. In return, Terraform delivered to Jump the option to purchase $2.5 million worth of its LUNA tokens at 40 cents apiece.

Jump turned around and sold those tokens for $1.28 billion, according to the lawsuit, filed by Taewoo Kim, a New Jersey resident who bought UST tokens between May 2021 and May 2022.

Afterwards, Kwon and Jump Crypto President Kanav Kariya, who also is a defendant in the lawsuit, reassured investors repeatedly that it was Terraform’s logarithmic set-up that restored value to UST and made no mention of Jump Trading’s extraordinary involvement in the rescue, according to the lawsuit.

These reassurances convinced crypto investors to buy billions more in LUNA and UST tokens until another UST meltdown in May 2022, just a year later, resulted in Terraform’s collapse, the lawsuit says.

Much of the information contained in the lawsuit derives originally from the Securities & Exchange Commission’s February lawsuit against Kwon and Terraform, filed in federal court in New York, alleging commodity fraud. That complaint didn’t name Jump Trading and instead used the generic term, “a proprietary U.S. trading firm.” Jump is identified as that firm in the prospective class-action suit, as well as multiple news reports.

A spokeswoman declined to comment on the new lawsuit or whether Jump is the unnamed trading firm in the SEC’s action.

The SEC described the trading firm’s help like this in its complaint: “In May 2021, UST dropped below $1.00. In response, defendants secretly discussed with a third party that the third party would purchase massive amounts of UST to restore the $1.00 peg.”

“As UST returned to $1.00,” the SEC went on, “Kwon and Terraform publicly and repeatedly touted the restoration of the $1.00 UST peg as a triumph of decentralization and the ‘automatically self-heal(ing)’ UST/LUNA algorithm over the ‘decision-making of human agents in time of market volatility,’ misleadingly omitting the actual reason why the $1.00 peg was restored: the third party’s intervention to prop up UST’s price. By late May, Terraform was publicly boasting to the investing public that it had purportedly proven the reliability of the UST $1.00 peg — the ‘lynchpin for the entire (Terraform) ecosystem’ — in a ‘black swan’ event that was ‘as intense of a stress test in live conditions as can ever be expected.’ “

When UST’s price plunged again a year later, there was no rescue. More than $40 billion in assets were wiped out, the SEC said, adding: “A number of retail investors in the United States lost their life savings. And some U.S. institutional investors lost billions of dollars in the market value of their LUNA and UST holdings.”

Terraform on April 21 filed a motion to dismiss the SEC lawsuit, arguing that the agency doesn’t have jurisdiction and that it didn’t offer “sufficient facts” to demonstrate that Terraform misled investors about the first UST meltdown in May 2021.

Kwon was indicted on federal fraud and conspiracy charges in New York in March, soon after he was arrested in a Montenegro airport attempting to travel to Dubai while being treated as an international fugitive. He allegedly held multiple passports. He went on trial today in that Balkan country on false-documents charges, according to the Washington Post.

The U.S. and South Korea have requested his extradition.

Kariya, the Jump Crypto president, appeared with Kwon on Jump Crypto’s inaugural episode of its podcast, “The Ship Show,” on March 1, 2022, according to the class-action lawsuit.

“Kwon . . . misrepresented during the episode that UST’s ‘slippage’ and ‘deviat(ion) from the peg’ in May 2021 had been ‘naturally’ and ‘automatically self-heal(ed)’ by TFL’s algorithm,” the lawsuit stated. “Kwon falsely and misleadingly omitted the truth about Jump’s active intervention to prop up the price of UST and manipulate the price of aUST. Kariya participated in the podcast but failed to correct any of Kwon’s false and misleading statements.”

The term “aUST” refers to a product Terraform called the “Anchor Protocol,” which served as a quasi-bank deposit. Investors could stash their UST tokens in it and earn interest while Terraform would lend those tokens to borrowers for periods of time. Launched in March 2021, aUST “was publicly touted . . . not as a pooled investment product but rather as ‘a principal-protected savings product with instant withdrawals and a stable interest rate,'” according to the lawsuit.

During the podcast, Kariya celebrated Jump’s relationship with Terraform, according to the suit. It quoted Kariya saying: “Do started off saying the first time we spoke was in 2019, and I hadn’t really quite internalized that until now. And so, yeah, it’s been really, really awesome working with you and the rest of the Terra community for over two years now. Kind of quite stunning to think about how far things have come, so yeah, just wanted to say that it’s been awesome.”

Two months later, when UST’s value again plummeted, Terraform reached out to Jump again, as well as Alameda Research, the former trading firm of now-disgraced and indicted crypto executive Sam Bankman-Fried, and New York-based trading firm Jane Street, according to Bloomberg. No bailout was coming this time.

Jump’s role in Terraform was kept secret until the SEC filed its suit on Feb. 16, according to the lawsuit. Reports in publications like CoinDesk, Fortune and The Crypto Times quickly identified Jump as the SEC’s unnamed prop trading firm, the suit said.