Stabilizing Terra: Algorithmic or Artificial?
The Securities and Exchange Commission (SEC) settled serious charges against Tai Mo Shan Limited after accusing the company of misleading investors about the stability of Terra USD (UST), an “algorithmic stablecoin” issued by Terraform Labs that depegged in 2021, never to regain its peg. Adding to the heat, Tai Mo Shan was also charged with acting as a statutory underwriter for Terraform’s crypto asset, LUNA.
This saga traces its roots to Terraform and its controversial founder, Do Kwon, who, in April 2024, were found liable for fraud and unregistered securities offerings. The fallout resulted in a staggering $4.5 billion settlement to compensate harmed investors.
According to the SEC, when UST crashed in May 2021, Terraform enlisted Tai Mo Shan to intervene. Terraform—on the verge of collapse—offered Tai Mo Shan a sweet deal: vested options to buy LUNA at a hefty discount in exchange for massive UST purchases to prop up the price. Tai Mo Shan jumped in, buying over $20 million of UST to help restore its $1 peg.
Thus, rather than the algorithm stabilizing the coin as Terraform claimed, Tai Mo Shan’s camouflaged maneuvers fueled a façade of stability, deceiving investors into believing the system was functioning as promised.
Tai Mo Shan’s troubles don’t end there. The SEC also found that from January 2021 to May 2022, the company acted as a statutory underwriter for LUNA. Tai Mo Shan acquired LUNA from Terraform and promptly resold it on U.S. crypto trading platforms, essentially distributing securities without proper registration.
SEC Chair Gary Gensler reminded the industry the SEC will not be tricked by labels: “[r]egardless of the labels, crypto market participants should comply with the securities laws where applicable and not deceive the public. Otherwise, investors get hurt.”
To settle the charges, Tai Mo Shan agreed to pay over $122 million in penalties, disgorgement, and interest. While neither admitting nor denying the allegations, the company has agreed to cease and desist from further violations of securities laws. The case once again underscores a hard truth: in the crypto world, smoke and mirrors can cost investors dearly.
ICYMI: CYNM
The SEC also filed a subpoena enforcement action against Cast Your Nets Ministries, its subsidiary CYNM Consulting, LLC, board member Phillip Trujillo, and executive Jeremy Hammonds. The SEC is seeking a court order compelling them to cough up documents and testimony related to a potentially fraudulent and unregistered securities offering.
In filings with the U.S. District Court for the District of Colorado, the SEC revealed it is investigating whether Cast Your Nets Ministries and its associates have flouted federal securities laws. The focus? The structure and operations of the ministry and its subsidiary, the products they promote, and a mysterious crypto asset spotlighted on the ministry’s website.
The products of concern include 1) the “CYN Legacy Program,” which was described as “a program partnering with Christian churches and organizations to facilitate fund raising projects;” 2) the “CYN Alternative Savings Plan,” which was described as “a short term, high-yield program that pays 2% per month up to 6 months for a total of 12%;” and 3) the “Alternative Retirement Program,” which CYNM advertised at various times as providing “15% Yearly Returns” or “a 25% return each year for three years.” The crypto asset at issue, known as the “CYN Token,” vaguely promised to “[d]ouble Your Retirement Savings In Just 5 Years.”
With such blatant investment schemes being offered, the subpoenas started flying earlier this year. CYNM Consulting received its first demand for documents on May 20, 2024, followed by Cast Your Nets Ministries on August 6. By September 30, the SEC had issued additional subpoenas to Trujillo for documents and testimony, as well as a testimony subpoena to Hammonds. Despite multiple follow-ups, compliance has been minimal, with the ministry, its consulting arm, and its executives failing to fully cooperate.
To date, the SEC has not determined that any individual or entity has violated the federal securities laws. Nevertheless, its investigation marches on, with subpoenas and questions piling up as it digs deeper into the ministry’s activities.
Kelman PLLC’s review of the SEC crypto litigation releases for November 2024 can be found here.