According to the complaint, Jane Street used material nonpublic information related to Terraform’s internal operations to gain an unfair trading advantage in TerraUSD (UST) and Luna markets during a critical period.

Claims of Front-Running and Market Advantage

The lawsuit alleges that Jane Street obtained sensitive, price-moving information from individuals connected to Terraform Labs before it became public. Armed with this knowledge, the firm is accused of engaging in “front-running” — placing trades ahead of anticipated large market moves to secure profits.

Snyder argues that Jane Street leveraged its market relationships to position itself advantageously during one of the most consequential events in crypto history. On behalf of affected creditors, the wind-down team has stated it intends to pursue all legal remedies available.

Jane Street has firmly denied the allegations, characterizing the lawsuit as opportunistic and without merit. The firm has indicated it will vigorously defend itself against the claims.

The Events That Triggered the Collapse

The chain of events dates back to May 7, 2022, when Terraform Labs quietly withdrew 150 million TerraUSD from the Curve3pool liquidity platform. The lawsuit claims that roughly 10 minutes before any public disclosure, a wallet allegedly linked to Jane Street withdrew 85 million UST from the same pool.

The withdrawals contributed to market instability. The following day, Terraform founder Do Kwon stated that the transaction was intended to move liquidity to a new stablecoin pool. However, confidence in TerraUSD quickly eroded.

By May 9, UST had begun losing its 1:1 dollar peg, and the Luna token rapidly collapsed. Within a week, approximately $40 billion in market value was wiped out, triggering widespread losses and impacting multiple crypto firms exposed to the ecosystem.

Aftermath and Ongoing Legal Scrutiny

Founded in 2018 in Singapore by Do Kwon and Daniel Shin, Terraform Labs was best known for the Terra blockchain, Luna token, and algorithmic stablecoin TerraUSD. The company filed for bankruptcy in January 2024, and a wind-down trust assumed control later that year.

In August, Do Kwon pleaded guilty to two criminal charges and received a 15-year prison sentence.

The lawsuit against Jane Street reopens debate over accountability in the Terra collapse. While the outcome remains uncertain, the case may have broader implications for insider trading enforcement and market conduct standards within the crypto industry.

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According to Terraform, the company behind the well-known algorithmic stablecoin Terra, bankruptcy will pay around $184.5 million and $442.2 million to stakeholders.

The company’s case was taken before the U.S. Securities and Exchange Commission; its wind-down follows Terraform closing another chapter.

Over the algorithmic stablecoin Terra USD (UST), which failed a year earlier, the SEC prosecuted Terraform and co-founder Do Kwon in February 2023. The government claimed the company misled and stole from investors. Both sides were haggling over minute details before the conclusion. While the SEC has requested they pay $5.3 billion, lawyers for Terraform and Kwon claimed fines should be closer to $1 million.

Terraform Labs agreed to pay fines to the U.S. District Court for the Southern District of New York totaling $4.7 billion in June. Terraform promised to pay $3.58 billion in disgorgement, $420 million in a civil penalty, and would prevent Kwon from serving as an officer or director of any public company as part of the deal.

As part of the bankruptcy process, the SEC stated it would obtain its claim once creditors were paid.

“Under the liquidation terms of the Chapter 11 Plan that Terraform is required to propose, the SEC will recover on its claim after harmed investors and other general unsecured creditors recover in full. If all Terraform’s assets are distributed pursuant to such a plan, the SEC’s monetary remedies will be deemed satisfied,” the agency stated in June’s settlement papers.

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Bankrupt crypto company Terraform Labs is set to face a Chapter 11 bankruptcy reorganization hearing on September 19. The outcome of the hearing will play a major role in the company’s future. Terraform has been struggling with legal battles and financial difficulties since the dramatic collapse of the Terra ecosystem in 2022.

The court’s decision will determine whether the company can restructure and emerge from bankruptcy or liquidate its remaining assets and cease operations altogether.

Terraform Labs Reorganization

Terraform Labs’ fortunes took a dramatic turn when its TerraUSD (UST) stablecoin lost its peg to the US dollar in May 2022, triggering a catastrophic crash that wiped out billions of dollars in value. This incident not only resulted in a loss of investor confidence, but also faced intense scrutiny from regulators, culminating in a lawsuit filed by the U.S. Securities and Exchange Commission (SEC) in February 2023.

In January 2024, Terraform Labs filed for Chapter 11 bankruptcy in the state of Delaware, marking the beginning of a long and complicated legal process. The company’s co-founder and former CEO Do Kwon was at the center of this controversy and faced legal action.

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In a joint settlement with the SEC in July 2024, Terraform and Kwon agreed to pay a staggering $4.5 billion in penalties, restitution, and interest. The agreement effectively banned Kwon and Terraform from the crypto industry.

Terraform is Winding Down Operations

As part of the bankruptcy process, Terraform Labs is currently planning to sell off significant assets as it winds down its operations. The company is actively exploring the sale of key assets such as portfolio tracking platform Pulsar Finance, crypto wallet platform Station, codeless decentralized autonomous organization management platform Enterprise, and smart contract automation protocol Warp. These businesses, once considered valuable assets, are being sold as part of Terraform’s efforts to raise funds to meet its obligations under the SEC settlement.

The $4.5 billion settlement with the SEC stands out as one of the largest penalties in the history of the crypto industry, highlighting the seriousness of the company’s violations and the far-reaching consequences of its collapse. Other steps in the restructuring process included the court-mandated burning of Terra (LUNA) tokens and the reopening of the Shuttle Bridge.

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Companies for Discount

Terraform said on July 9 that it is “actively exploring options” to sell its portfolio monitoring system Pulsar Finance, crypto wallet platform Station, no-code decentralized autonomous organization (DAO) administration system Enterprise, and smart contract automation tool Warp.

Buying Pulsar Finance in November 2023, Terraform declared Chapter 11 bankruptcy in January in Delaware just some months later. In November 2022, the business was introduced to Enterprise. The warp protocol was launched at the end of February, and Station wallet in March, meaning both projects are currently further developed.

Part of Terraform’s “broader wind-down of operations under the terms of its settlement with the US Securities and Exchange Commission” the transaction intends to “maximize value for its creditors and other stakeholders.”

Settlement with SEC

Terraform settled with the SEC this month for $4.5 billion, agreeing to pay around $3.6 billion in disgorgement, a $420 million civil penalty, and almost $467 million in prejudgement interest. Together with Terraform, when signing the consent, Do Kwon, the founder and the former chief executive officer, agreed to Disgorgement of $110 million, prejudgment interest in the total of $14,3 million, and a Civil penalty in the amount of $80 million.

Closing the SEC’s February 2023 lawsuit for securities law violations and fraud against Kwon and Terraform Labs, the settlement also effectively precluded them from the digital assets industry.

Effect on Terra Ecosystem

Originally Terraform developed the US dollar algorithmic stablecoin TerraUSD (UST), now TerraClassicUSD (USTC), which lost its peg to the dollar in May 2022. Terraform also launched the cryptocurrency Terra Luna Classic better known as LUNC. For USTC as well as LUNC, the depeg began the death spiral that saw the assets’ prices plunge more than 100%.

Using data sourced from CoinGecko, the present token, Terra was unmoved with the news it out down 3% on the week to $0. 37 and it is lower by 98% its’s position of the beginning of May of this year at $18,87.

On the divestment of its companies, Terraform has encouraged interested parties to contact CAVU Securities, the firm’s investment banker.

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Ripple, which has been in a protracted legal fight with the SEC over the past few years, claimed on Thursday that financial penalties suggested by the agency were irrational in a “notice of supplemental authority.” The company contrasted fines against Terraform Labs against the SEC’s suggested $2 billion fine for selling XRP. Ripple has maintained that the penalties ought to be around $10 million.

Comparing Penalties with Terraform

The judge signed off on the settlement after Terraform agreed to pay fines of $4.47 billion on Wednesday and subsequently on Thursday.

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“The civil penalty sought by the SEC in Terraform shows the unreasonableness of the civil penalty sought by the SEC in this case,” ripple’s lawyers argued. “As Ripple’s opposition stated, the SEC has consented to civil penalties ranging from 0.6% to 1.8% of the defendant’s gross profits in similar (and even more egregious) circumstances. Terraform conforms to that pattern.”

Ripple also mentioned the April judgment verdict finding Terraform Labs and cofounder Do Kwon engaged in civil fraud.

Ripple’s Defense Against Excessive Penalties

“Here, by contrast, the SEC seeks a civil penalty far exceeding that range, even though there are no allegations of fraud in this case and institutional buyers did not suffer substantial losses,” the lawyers noted. “Terraform thus confirms that the Court should reject the SEC’s disproportionate and unprecedented request and that an appropriate civil penalty would be no more than $10 million.”

Years after the SEC said the company raised $1.3 billion via XRP, which it claims is an unregistered security, the SEC and Ripple have been fighting in court. Judge Analisa Torres of New York decided last year that a blind bid system in place for XRP allowed some of company’s sales—called programmatic—not to violate securities laws. She did, however, decide that other direct token sales to institutional investors qualified as securities.

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The SEC‘s proposal includes a demand for about $4.7 billion in disgorgement and prejudgment interest, along with civil penalties of $420 million for Terraform and $100 million for Kwon. However, the lawyers representing the defendants believe that these figures are excessively high.

In a court filing posted late last week, Terraform and Kwon’s legal team argued for a significantly lower penalty. They stated that the court should not grant injunctive relief or disgorgement and should, at most, impose a $1 million civil penalty against Terraform Labs (TFL).

The SEC charged Terraform and Kwon in February 2023 over issues related to the algorithmic stablecoin Terra USD (UST), which experienced a dramatic collapse in value a year earlier. Terra USD, linked to the governance token luna, aimed to maintain price stability through algorithmic market incentives. However, in May 2022, UST crashed, resulting in losses exceeding $50 billion.

A jury recently found both Terraform and Kwon liable for civil fraud, based on allegations that they misled investors. Key issues examined by the jury included claims by the SEC that Terraform and Kwon violated federal securities laws through fraudulent activities related to the trading of Terraform securities. Additionally, Judge Jed Rakoff had previously granted summary judgment to the SEC, supporting claims that Terraform and Kwon offered and sold unregistered securities.

Following the verdict, a spokesperson for Terraform stated that the company is carefully evaluating its options and considering its next steps in response to the legal proceedings.

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SEC is Trying to Prove the Accuracy of The Company’s Transfers

In a recent court filing submitted to the Delaware bankruptcy court, the SEC urged the denial of Terraform Labs’ retention of Dentons U.S. LLC as its special counsel. The SEC highlighted the sizable transfer of funds to Dentons, with $122 million of the total amount being moved within 90 days preceding the bankruptcy filing. This, according to the SEC, raises suspicions of an attempt to deplete company assets that could otherwise be directed towards settling any judgments arising from the SEC’s enforcement measures.

The SEC pointed out that a significant portion of the transferred funds was designated to the Dentons Advance Payment Retainer, characterized by the SEC as an obscure reservoir of resources for legal matters. This, the SEC argued, potentially serves as a “war chest” for Terraform Labs to prolong its legal battle against the SEC.

Furthermore, the SEC noted that a substantial portion of the payment to Dentons has already been allocated towards covering litigation expenses, leaving $81 million remaining in the Dentons Advance Payment Retainer. The SEC contends that Dentons should not be granted authorization to represent Terraform Labs unless the unused portion of the payment is returned.

Additionally, the SEC raised concerns about the utilization of the Dentons Advance Payment Retainer to finance legal expenses related to Terra CEO Kwon Do-hyeong’s criminal proceedings in Montenegro, which are deemed unrelated to his role at Terraform Labs.

In light of these concerns, the SEC has requested the court to appoint a fee examiner to scrutinize the suspicious timing and magnitude of the retainer payment.

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In a filing with the Manhattan federal court, the SEC argued for a modest delay of the trial, which was originally scheduled for January 29. The decision was made after Kwon’s lawyer said that Kwon had agreed to extradition from Montenegro and could be in the U.S. by mid-March.

The SEC also sought to prevent unnecessary duplication of testimony by opposing separate trials for Terraform and Kwon. U.S. District Judge Jed Rakoff will consider the SEC’s request for a trial date on April 15.

Last month, Rakoff ruled that Terraform and Kwon had violated U.S. laws and put Kwon at risk of extradition from South Korea.

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