US SEC charges Tai Mo Shan with misleading investors regarding the stability of the Terra USD peg, imposing $123M penalties for fraud.
Tai Mo Shan Limited, a subsidiary of Jump Crypto Holdings LLC, has been charged by the U.S. Securities and Exchange Commission (SEC) with deceiving investors regarding the stability of Terra USD (UST), an algorithmic stablecoin developed by Terraform Labs.
The SEC also accused Tai Mo Shan of unlawfully offering and selling LUNA, a cryptocurrency issued by Terraform, as unregistered securities.
Investors Are Being Misled Regarding the Stability of the Terra USD Peg
The SEC claimed that Tai Mo Shan deceived investors by presenting the impression that Terraform Labs’ algorithmic mechanism was maintaining the $1 peg of UST. In May 2021, Tai Mo Shan agreed with Terraform Labs to intervene in the stabilization of the price of UST when it fell below $1. Terraform provided Tai Mo Shan with discounted LUNA tokens as an incentive to purchase UST and attempt to reestablish its peg by this agreement.
Tai Mo Shan temporarily stabilized the stablecoin’s price by making substantial purchases of UST, totaling over $20 million, on May 19, 2021.
The SEC reported that these actions deceived the market into believing that Terraform’s algorithm was maintaining the peg when, in reality, the stability was being driven by Tai Mo Shan’s trades. The SEC deemed this conduct negligent because investors were not informed about the reliance on external intervention to stabilize UST.
Function as a Statutory Underwriter for LUNA
According to the SEC’s findings, Tai Mo Shan acquired LUNA tokens to resell them on U.S.-based platforms, serving as a statutory underwriter for Terraform Labs.
Tai Mo Shan violated U.S. securities laws by offering and selling these tokens as securities without proper registration from January 2021 to May 2022.
The SEC classified LUNA as a security, noting that Tai Mo Shan acquired the cryptocurrency from Terraform for distribution to the public. This activity further exacerbated the SEC’s charges of unregistered securities offerings.
Tai Mo Shan consented to pay a $36.72 million civil penalty, $12.91 million in prejudgment interest, and $73.45 million in disgorgement as part of the settlement. These penalties are intended to address the illegal gains obtained through unregistered transactions and misleading actions.
Tai Mo Shan did not acknowledge or deny the findings of the SEC’s investigation. The company, however, consented to a cease-and-desist order that forbade any future violations of federal securities laws.
Investor Protection Statement of the Securities and Exchange Commission of the United States
SEC Chair Gary Gensler underscored the necessity of compliance in the crypto markets, stating, “Too frequently in the crypto markets, we have observed investor losses as a result of fraud.” The public should not be deceived, and crypto market participants should adhere to securities laws, regardless of the labels. Otherwise, investors are adversely affected.
Earlier in 2024, Terraform Labs and its founder, Do Kwon, were found liable for fraud and unregistered securities offerings, as the SEC stressed. The Terra ecosystem’s collapse has resulted in a widespread fallout, as Terraform and Kwon have agreed to pay $4.5 billion to compensate harmed investors.
This case represents an additional advancement in the Securities and Exchange Commission’s ongoing endeavors to oversee the cryptocurrency sector and safeguard investors from fraudulent activities.
