Terraform Labs seeks access to FTX wallets in fraud defense

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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 brought by the United States Securities and Exchange Commission (SEC) in February, a court filing shows.  

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

“To establish these defenses, TFL needs Debtors’ records about wallets, accounts, and assets used to transact on the FTX International and US exchanges and sales/offers of large volumes of cryptocurrencies developed by TFL, if any, by FTX Trading and West Realm Shires Services Inc. d/b/a FTX US.”

On Feb. 16, the SEC filed a lawsuit against Terraform Labs and its founder, Do Kwon, for allegedly “orchestrating a multi-billion dollar crypto asset securities fraud.” According to the regulator, Terraform was offering unregistered securities in an operation through its failed algorithmic stablecoin, TerraUSD (UST), and the Terra Luna (LUNA) token. The failure of Terraform in 2022 resulted in a loss of over $40 billion from crypto markets.

Screenshot of Terraform’s motion seeking permission to subpoena FTX information. Source: Kroll

The motion also requested information about wallets used by Jump Trading, which the SEC accused 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 an arrangement with Terraform to restore the stablecoin peg to $1.

“Defendants misrepresented UST’s recovery by claiming that the algorithm was able to restore and maintain the price peg. According to the SEC, UST instead recovered its price peg because Defendants entered an arrangement with a U.S. trading firm, Jump Trading, […] to purchase substantial amounts of UST to support the price,” reads the court filing.

Terraform is also seeking to dismiss a parallel class-action lawsuit in California, arguing that since it’s based in Singapore, the U.S. securities laws referenced are not applicable to its foreign-developed protocols.

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