The South District Prosecutor’s Office in Seoul, Korea, is investigating whether to bring charges of a Ponzi scheme against Terraform Lab CEO Do Kwon.
Prosecutors in Korea are considering indicting Terraform Labs co-founder Do Kwon for running a Ponzi scheme using the Anchor Protocol, a type of crypto bank that offers depositors up to 20% annual returns for staking can earn Terra. “Kwon’s statements promising returns could provide an important clue,” a prosecutor told the Korea Herald. Named after Italian scammer Charles Ponzi, a Ponzi scheme rewards existing or early investors with funds paid by new investors. As funds from new investors run out, the Ponzi scheme collapses. As BeInCrypto recently reported, FTX CEO Sam Bankman-Fried recently described yield farming as a Ponzi scheme.
Lawsuits against Terra begin
Last Thursday, five Korean investors joined forces to file a class-action lawsuit against Kwon and co-founder Shin Hyun-Seong with law firm LKB & Partners. The lawsuit alleges that Terraform Labs failed to alert investors to weaknesses in algorithmic stablecoin Terra (UST), resulting in $1.1 million in losses for investors. Six attorneys from LKB’s Capital Markets and Intellectual Property departments also filed an injunction to confiscate Kwon’s property. Some of the LKB staff also lost money when UST dropped from its dollar peg earlier this month, sending shockwaves through the industry.” TerraUSD derived its stability from an algorithmic relationship with Luna, its sister coin.
“There are related investors within the law firm, and we plan to file a complaint against CEO Kwon with the Seoul Metropolitan Agency’s Financial Investigation Unit, which is also being considered,” said Kim Hyeon-Kwon, a partner at the law firm.
Terraform’s legal team resigned after the UST crash and an outside attorney is now handling all of the company’s legal affairs.
Institutional investors have been criticized for lending credibility to Terra
30-year-old Stanford graduate Kwon, who previously worked as a software engineer at Microsoft and Apple, began offering investors the cryptocurrency Luna in 2018. Early supporters of the project included Pantera Capital, Galaxy Digital and Lightspeed Venture Partners. Pantera Capital made 100 times more than its original investment when it sold its Luna holdings last year, raising approximately $170 million from an initial investment of $1.7 million. Paul Veradittakit, an investor at Pantera, said after a recent run that saw TerraUSD, the stablecoin offered by Terraform Labs since 2020, crash from its dollar peg, “A lot of retail investors have lost money. I’m sure a lot of institutional investors have done the same.” Kathleen Breitman, one of the founders of the Tezos blockchain, said that institutional investment in Terraform Labs “brings a false sense of security to people who might not otherwise know about these things “.
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