This is a collaborative investigation opened for investors to read facts, track and explore legal aspects of the following questions:
Was the platform design flawed? Were the stabilization mechanisms improper and was the crash meant to happen?
Is anyone liable for the TerraUSD (UST)/Luna crypto crash? Are the founders liable to investors?
Is there any ongoing legal recourse to help investors recoup financial losses?
We invite investors, journalists and others to contribute to this investigation for their own benefit. We have added events to the factual timeline below and welcome new developments. We will update the post with any legal recourse in the U.S.
Around May 10, 2022, TerraUSD (UST) lost its dollar peg allegedly due to a decline in UST deposits on Anchor protocol, falling below $0.70. In the following days, Luna’s price goes down more than 99%. Bitcoin is pledged in an effort to reverse the course, but the plan does not work. Exchanges begin to halt trading of LUNA and UST, and Terra announces it halted the blockchain. Do Kwon, CEO of Terraform subsequently discloses a revival plan, voted by 66.03% of the Terra holders on the blockchain: on May 28, 2022, Luna 2.0 is first mined, but quickly loses its value.
Investors have suffered large financial losses.
For a detailed explanation of what Luna, Terraform and TerraUSD, Mirror Protocol, Chai, etc. are, we suggest reading this. For a further technical explanation (by Do Kwon and others) of what Terraform is, read the 2019 white paper, available here.
LKB & Partners (website), a law firm in Seoul, announces its intent to file a lawsuit against Terraform’s founders Kwon Do-hyung alleging platform design flaws, unregistered & unsustainable interest rates of 19.4%. The law firm estimates the number of victims to be 200,000.See more on Factual Timeline
An investor filed a securities class action on behalf of a class consisting of all persons and entities, other than defendants and their affiliates, who purchased UST, LUNA, ANC, mirrored assets, and bonded assets (all together referred to as Terra Tokens) between May 20, 2021 and May 25, 2022, inclusive, and who were damaged thereby.
The lawsuit alleges that the Terra Tokens are securities that TerraForm Labs Ptd Ltd. (TFL) failed to register before selling and (ii) that TFL and the Luna Foundation Guard misled U.S. investors concerning the stability of UST and LUNA, as well as the sustainability of Anchor.
“Even though the Terra Tokens bear all the hallmarks of being investment contracts and, thus, securities under the Howey test, no registration statements have been filed with the SEC with respect to the various Terra Tokens.
Defendants made a series of false and misleading statements regarding the largest Terra ecosystem digital assets by market cap, UST and LUNA, in order to induce investors into purchasing these digital assets at inflated rates.
TFL repeatedly touted the stability of UST as an “algorithmic” stablecoin that is paired to the Terra ecosystem’s native token LUNA and the sustainability of the Anchor Protocol – a type of high-yield savings account whereby investors can “stake” or deposit UST with TFL in exchange for a guaranteed 20% APY interest rate.
As a part of this promotional campaign, TFL formed the Luna Foundation Guard – a group six venture capital groups that promised to support and fund the Terra ecosystem and to “defend the peg” in the event that high volatility caused the UST/LUNA pair to become untethered from one another. The Luna Foundation Guard and its members Jump Crypto, Tribe Capital, Republic Capital, GSR, DeFinance Capital, and Three Arrows Capital acted on behalf of TFL to promote the stability of UST and mislead investors into believing that (1) the Luna Foundation Guard’s reserve pool would be sufficient to defend the peg against a proverbial run on the bank by UST/LUNA investors, and (2) that the Luna Foundation Guard would be able to maintain interest payments from the Anchor Protocol through a well-capitalized “Anchor Yield Reserve” fund.
These promotions, along with the announcement of financial backing of major venture capitalists in the sector, were a siren song to both veteran and rookie crypto investors alike, luring them in with a purportedly “stable” digital asset in UST that would nevertheless provide outsized returns on investment via Anchor. The marketing of UST and Anchor was so effective that approximately $14 billion of UST’s market cap (75%) was deposited into Anchor at its peak.
Between May 6, 2022 and May 9, 2022, however, structural infirmities specific to the Terra ecosystem exposed a crack in UST’s ability to maintain its peg to $1. The truth regarding the stability and sustainability of the UST/LUNA pair and the Anchor Protocol could not be hidden any longer from investors, and within a week, the price of UST and LUNA collapsed by approximately 91% and 99.7%, respectively.”
We will update this page as the lawsuit progresses
A securities class action lawsuit is a lawsuit on behalf of investors considered in a similar position, who purchased or sold securities of a company during a certain period and suffered losses because of an alleged wrongdoing. Security is often broadly defined to include bonds, stocks, options, derivatives, and other instruments.
Section 10b of the Securities Exchange Act of 1934 makes it unlawful to “use or employ, in connection with the purchase or sale of any security” a “manipulative or deceptive device or contrivance in contravention of such rules and regulations as the [SEC] may prescribe.” 15 U.S.C. § 78j(b). It is therefore forbidden to: employ any device, scheme, or artifice to defraud; make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made not misleading; or engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person.
Generally, to be successful, the plaintiff must plead the following:
We invite you to read this article from the American Bar Association which, although from 2014, provide ample information to explore the world of class actions brought under section 10b of Securities Exchange Act of 1934.
Section 11 of the Securities Act of 1933 provides “an express right of action for damages . . . when a registration statement contains untrue statements of material fact or omissions of material fact.” (Thomas Lee Hazen, Treatise on the Law of Securities Regulation, §7.3 at 581 (4th ed. 2002)). Practically, buyers in an initial public offering (IPO), relying on the registration statement and prospectus, are given the right to file a complaint against the company and other signatories for losses sustained as a result of the deficient registration statement and prospectus.
Generally, at least four elements must be plead for the claim to survive:
A shareholder derivative lawsuit is a lawsuit brought by a shareholder of a company, on behalf of the company, against an insider (director, board of directors, executives) or a third-party to redress wrongs and harms to the company. Simply speaking, this mechanism exists because one cannot expect directors and insiders to sue themselves for harms they have done to the company.
The Private Securities Litigation Reform Act (PSLRA) of 1995 was enacted to tighten requirements for securities class actions to be brought in the United States. One of the mechanism put in place was a 60-day period, following the filing of the initial securities class action, for any shareholder considered in similar position to the one filing the initial class action complaint, to ask to be named lead plaintiff. Practically, any time a securities class action falling under the PSLRA is filed with a court, law firms advertise their willingness to pursue the case and invite other investors similarly situated to contact them.
The lead plaintiff in a securities class action is a shareholder who suffered losses related to the purchase or sale of a company’s security during a certain period of time, that is appointed with its choice of counsel to represent the rest of the similarly situated shareholders. To be appointed lead plaintiff, you need to contact a law firm, have them examine your losses and agree to be represented by them and ask to make a motion with the court to be appointed lead. The court will then look at all the motions from the different shareholders and make its decision based on a certain set of criteria. Your inability to be lead plaintiff shall not prevent you from any potential recovery in the event of a settlement.
A class period is a set period of time during which the purchasers or sellers of a company’s security claim in a class action lawsuit to have suffered losses. Class periods are based on the merits of the case and may evolve with the litigation.
A class action complaint will define the initial class of investors: the class period and the persons included in the class. You should look at the definition of the class to determine whether you are included or not. However, the class definition will evolve with the litigation. Its definition is very likely to change between the initial complaint filed and the possible settlement. Generally speaking, you should rely on the definitions of the class stated in a stipulation of settlement to determine whether or not you will be entitled to any recovery (see below about the opting-out mechanism).
You may. The mechanism is called opting-out of class. A lead plaintiff will agree on the potential recovery ratio in a settlement. You may have an interest in opting-out of a class if you have sustained large losses and believe bringing a separate lawsuit would entitle you to a larger ratio of recovery.
You may be able to bring a claim to arbitration in certain scenarios. We encourage you to contact a law firm of your choice to inquire about such alternative dispute resolution mechanism.