Terraform Labs seeks access to the FTX wallet in fraud defense

Terraform Labs is seeking permission from a judge to subpoena data from bankrupt crypto exchange FTX, claiming the information could help its defense against a lawsuit filed by the United States Securities and Exchange Commission (SEC) in February, court filing show.

In an effort to find evidence that could support his defense against fraud charges, Terraform’s lawyers filed a motion on July 19 in the FTX bankruptcy case to access company information about digital wallets used by short sellers between March 2022 and May 2022. Terraform claims the failure of its stablecoin was the result of a coordinated attack from short sellers, possibly involving Alameda Research, FTX’s sister company.

“To establish these defences, TFL requires Debtor records of wallets, accounts and assets used to transact on FTX International and US exchanges and the sale/offer of cryptocurrency in bulk developed by TFL, if any, by FTX Trading and West Realm Shires Services Inc. d/b/a FTX US.”

On February 16, the SEC filed a lawsuit against Terraform Labs and its founder, Do Kwon, for allegedly “organizing a multibillion-dollar crypto-asset securities fraud.” According to regulators, Terraform offers unregistered securities in an operation through its failed algorithmic stablecoin, TerraUSD (UST), and Terra Luna token (LUNA). Terraform’s failure in 2022 resulted in a loss of over $40 billion from the crypto market.

Screenshot of Terraform motion requesting permission to call FTX information. Source: Kroll

The motion also requests information about the wallet used by Jump Trading, which the SEC accuses of collaborating with Terraform in manipulating the price of the UST stablecoin. Jump Trading has been sued in Illinois on similar grounds for allegedly purchasing millions of UST tokens in 2021 as part of a deal with Terraform to bring the stablecoin benchmark back to $1.

“Defendants misrepresented the UST recovery by claiming that the algorithm could recover and keep prices fixed. According to the SEC, UST instead got back the stake because the Defendants entered into an agreement with US trading company Jump Trading, […] to buy UST in bulk to support prices,” the court filing read.

Terraform is also seeking to contest a parallel class action lawsuit in California, arguing that because it is based in Singapore, the US securities laws it references do not apply to protocols developed overseas.

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