Terraform Labs Pte Ltd. (Luna/TerraUSD UST)

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.

Complaint Summary

“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.”