Do Kwon Extradited To The United States From Montenegro To Face Charges Relating To Fraud Resulting In $40 Billion In Losses

Kwon Engaged in Extensive Fraud, Laundered Crime Proceeds, and Sought to Cover Up His Crimes After Terraform’s Cryptocurrencies Crashed 

Daniel M. Gitner, Attorney for the United States, Acting under Authority Conferred by 28 U.S.C. § 515; Merrick B. Garland, the Attorney General of the United States; and James E. Dennehy, Assistant Director in Charge of the New York Field Office of the Federal Bureau of Investigation (“FBI”), announced today that DO HYEONG KWON was extradited from Montenegro and appeared in a federal courtroom in Manhattan earlier today to face federal fraud charges. Mr. Gitner also announced the unsealing of a Superseding Indictment against KWON. As alleged, KWON, the co-founder and former chief executive officer of Terraform Labs PTE, Ltd. (“Terraform”), engaged in multiple schemes to deceive investors in order to fraudulently inflate the value of Terraform’s cryptocurrencies. KWON arrived in the United States on December 31, 2024, and made his initial appearance in the Southern District of New York before U.S. Magistrate Judge Robert W. Lehrburger.  KWON’s case is assigned to U.S. District Court Judge John P. Cronan, and will appear before Judge Cronan for an initial conference on January 8, 2025, at 10:30 a.m. 

Attorney for the United States Daniel M. Gitner said: “A federal grand jury has indicted Do Kwon for misleading his investors in order to fraudulently inflate the value of Terraform’s cryptocurrencies and laundering the proceeds of his crimes. As we allege, this fraud and the crash of Terraform’s cryptocurrencies in May 2022 erased over $40 billion in investor assets, causing devastating losses to countless investors in the United States and around the world. Kwon will now face justice in a federal courtroom in Manhattan.” 

Attorney General Merrick B. Garland said: “Do Hyeong Kwon will now be held accountable in an American courtroom for, as alleged in court documents, his elaborate schemes involving Terraform’s cryptocurrencies, which resulted in over $40 billion in investor losses.  We secured this extradition despite Kwon’s alleged attempt to cover his tracks by laundering proceeds of his schemes and trying to use a fraudulent passport to travel to a country that did not have an extradition treaty with the U.S.  This extradition from Montenegro is an example of the Justice Department’s international partnerships, which enable the pursuit of criminals wherever they attempt to hide.”

FBI Assistant Director in Charge James E. Dennehy said: “Do Kwon, co-founder and former CEO of Terraform, allegedly defrauded investors by falsely advertising the company's blockchain products as decentralized, reliable, and effective, and by engaging in market manipulation, ultimately resulting in more than $40 billion in investor losses. For at least four years, Kwon allegedly played puppet master to maintain this crafted illusion and ensnare investors. The FBI will tirelessly work to apprehend any individual who engages in fraudulent financial practices, even those who flee internationally to escape prosecution.”

As alleged in the Superseding Indictment unsealed today in Manhattan federal court:[1]

From at least in or about 2018, up to and including in or about 2022, KWON orchestrated schemes to defraud purchasers of Terraform cryptocurrencies.  Among other things, KWON made false and misleading claims regarding the stability and efficacy of Terraform’s cryptocurrency stablecoin protocol, its use of blockchain technology, and its development of functioning and reliable financial technologies.

As KWON knew, however, core Terraform products did not work as KWON had claimed. Rather, KWON manipulated Terraform products to create the illusion of a functioning, stable, and decentralized financial system. KWON’s conduct inflated the value of Terraform’s cryptocurrencies, which KWON and entities he controlled possessed in large amounts and sold to investors in exchange for billions of dollars’ worth of other assets.

KWON’s misrepresentations included the following:

• The Stablecoin Misrepresentations: KWON made misrepresentations about the effectiveness of the system that lay at the heart of Terraform’s cryptocurrency empire, the “Terra Protocol,” which purportedly used a computer algorithm to maintain the value of Terraform’s so-called “stablecoin” pegged to the U.S. dollar, TerraUSD (“UST”), at a value of $1 for one UST. But as KWON knew, after the Terra Protocol failed to cause the restoration of UST’s $1 peg in May 2021, KWON reached an agreement with executives at a high-frequency trading firm (the “Trading Firm”) so that the Trading Firm would purchase large amounts of UST in order to artificially support UST’s $1 peg.
• The LFG Misrepresentations: KWON made misrepresentations about the governance of the Luna Foundation Guard Ltd. (the “LFG”), which KWON claimed was managed by an independent governing body and was tasked with deploying billions of dollars’ worth of financial reserves to defend UST’s peg. But as KWON knew, he controlled both the LFG and Terraform. In addition, KWON misappropriated hundreds of millions of dollars in assets from the LFG. KWON and others acting at his direction sought to launder those misappropriated funds through transactions designed to conceal and disguise the nature, location, source, ownership, and control of the funds.
• The Mirror Misrepresentations: KWON made misrepresentations about the success and operation of an investing platform on Terraform’s blockchain (the “Terra blockchain”) called Mirror Protocol (“Mirror”), that purportedly allowed users to create, buy, and sell synthetic versions of stocks listed on U.S. securities exchanges. KWON claimed that Mirror operated in a decentralized manner and that he and Terraform played no role in Mirror’s governance. But as KNOW knew, he and Terraform secretly maintained control over Mirror, and used automated trading bots to manipulate the prices of synthetic assets that Mirror issued. KWON also caused Terraform to inflate key user metrics to deceive investors.
• The Chai Misrepresentations: KWON falsely claimed that the Terra blockchain was being used to process billions of dollars in financial transactions for the Korean payment-processing application Chai. In doing so, KWON claimed that the Terra blockchain had “real world” applications or uses, as distinct from competing cryptocurrency platforms. But as KWON knew, Chai processed transactions through traditional financial processing networks, not the Terra blockchain.
• The Genesis Coin Misrepresentations: KWON made misrepresentations about the use of a supply of one billion stablecoins programmed into the Terra blockchain at its creation (the “Genesis Stablecoins”), which were purportedly held in reserve for Terraform for certain specified uses. But KWON used at least $145 million worth of Genesis Stablecoins, among other things, to fund fake Chai blockchain transactions and trading bots to manipulate the prices of synthetic assets that Mirror issued.

At its peak in the spring of 2022, the total apparent market value of all UST and another Terraform cryptocurrency, LUNA, exceeded $50 billion. Much of this growth followed KWON’s misrepresentations about Terraform and its technology, including efforts in May 2021 by KWON and his associates to secretly manipulate the market for UST. By May 2022, the UST market was approximately nine times larger in terms of market capitalization and more than eight times larger in terms of daily trading volume relative to May 2021. In May 2022, UST’s peg began to break down as it had a year prior. While KWON was able to cover up the weaknesses of the Terra Protocol in May 2021, he was not able to do so in May 2022. As a result, the value of UST and LUNA crashed and investors suffered over $40 billion in losses. After the crash of UST and LUNA in May 2022, KWON caused the distribution of a misleading “third party audit” report to cover up his crimes, and sought to launder the proceeds of his fraud through different blockchains, cryptocurrency exchanges, and a Swiss bank account.

On or about March 23, 2023, KWON was arrested in Europe for trying to use a fraudulent passport to travel to a country that did not have an extradition treaty with the U.S.

KWON was previously charged in this District in an initial Indictment on March 23, 2023.

KWON, 33, a citizen of the Republic of Korea, is charged with two counts of commodities fraud, each of which carries a maximum sentence of 10 years in prison; two counts of securities fraud, each of which carries a maximum sentence of 20 years in prison; two counts of wire fraud, each of which carries a maximum sentence of 20 years in prison; two counts of conspiracy to commit commodities fraud, securities fraud, and wire fraud, each of which carries a maximum sentence of five years in prison; and one count of money laundering conspiracy, which carries a maximum sentence of 20 years in prison. In aggregate, KWON faces a maximum sentence of 130 years in prison.

The maximum potential sentences are prescribed by Congress and are provided here for informational purposes only, as any sentencing of the defendant will be determined by a judge.

Mr. Gitner praised the investigative and operational work of the FBI. He also thanked Jason Cunningham and Goran Krnaich of the Department of Justice’s Office of International Affairs, Interpol, and the Ministry of Justice, Supreme State Prosecutor’s Office, Special State Prosecutor’s Office, and Police Directorate of Montenegro for their assistance in the extradition of the defendant. Mr. Gitner further thanked the U.S. Securities and Exchange Commission, which previously filed a separate civil action against KWON, and the Commodity Futures Trading Commission.

This case is being handled by the Office’s Securities and Commodities Fraud Task Force. Assistant U.S. Attorneys Jared Lenow, Kimberly Ravener, and Andrew Thomas are in charge of the prosecution.

 

[1] As the introductory phrase signifies, the entirety of the text of the Superseding Indictment, and the description of the Superseding Indictment set forth herein, constitute only allegations, and every fact described should be treated as an allegation.