On 20 December 2024, the United States Securities and Exchange Commission (US SEC) issued an order instituting cease-and-desist proceedings pursuant to Section 8A of the United States Securities Act of 1933, making findings, and imposing a cease-and-desist order against Tai Mo Shan Limited, a subsidiary of Jump Crypto Holdings LLC. The company has been ordered to pay US $123 million in penalties and disgorgements for its role in misleading investors about the stability of Terraform Labs’ Terra USD (UST) stablecoin and engaging in unregistered sales of LUNA, a crypto asset classified as a security. This case highlights critical lapses in transparency and compliance in the cryptocurrency sector and reinforces the US SEC’s commitment to safeguarding investor interests and upholding market integrity.
Tai Mo Shan Limited’s involvement with Terraform Labs began in November 2019, when the company entered agreements with Terraform, a Singapore-based firm responsible for issuing LUNA and UST. Terraform marketed UST as an “algorithmic stablecoin” designed to maintain a one-to-one peg to the US dollar through automated arbitrage mechanisms involving LUNA. Between January 2021 and May 2022, Tai Mo Shan participated in Terraform’s ecosystem by acquiring LUNA and engaging in its distribution on US-based crypto platforms without registering these transactions as required under United States securities laws.
The case took a decisive turn in May 2021 when UST devalued sharply, losing its US $1 peg. Tai Mo Shan’s subsequent trading activities, coordinated with Terraform, were designed to restore UST’s value but ultimately misled investors. The US SEC found that Terraform’s public assurances about the stability of UST were contradicted by Tai Mo Shan’s role in artificially propping up its price through large-scale purchases incentivised by Terraform.
The US SEC’s findings revealed that Tai Mo Shan acted as a statutory underwriter for LUNA, which the Commission classified as a security. The company acquired LUNA directly from Terraform with the intent to distribute it to the public, a practice requiring registration under Sections 5(a) and 5(c) of the United States Securities Act of 1933. However, no registration statement was filed, nor were any exemptions from registration applicable. The US SEC concluded that Tai Mo Shan’s activities constituted an unregistered securities offering, violating federal law.
In May 2021, UST’s value began to decline sharply, undermining investor confidence. Tai Mo Shan, incentivised by Terraform, entered into agreements to purchase over US $20 million worth of UST in an attempt to restore its US $1 peg. These actions created a false impression in the market that Terraform’s algorithmic mechanisms were functioning effectively to stabilise UST. The US SEC noted that Tai Mo Shan acted negligently in supporting UST’s price without disclosing the true source of the stabilisation efforts, thereby misleading investors about the stablecoin’s stability and Terraform’s technological claims.
The US SEC determined that Tai Mo Shan’s conduct violated several provisions of the United States Securities Act of 1933, such as Sections 5(a) and 5(c) by engaging in unregistered offers and sales of securities (LUNA) and Section 17(a)(3), by engaging in a course of business that operated as a fraud or deceit upon investors through its trading activities during the UST de-peg.
To address these violations, the US SEC imposed a set of sanctions, including, Disgorgement of Profits, and Tai Mo Shan was ordered to return US $73,452,756 in profits earned from its activities along with Prejudgment Interest i.e. an additional US $12,916,153 in interest was assessed and Civil Penalty to the tune of US $36,726,378 for its negligent conduct. The total penalty of US $123,095,287 is to be paid within 14 days of the US SEC’s order. The US SEC has established a Fair Fund under Section 308(a) of the United States Sarbanes-Oxley Act of 2002 to distribute these funds to harmed investors. Terraform Labs, the issuer of LUNA and UST, had previously been found liable for fraud and unregistered securities offerings in a separate case, with a federal court ordering it to pay US $4.5 billion in damages in April 2024. Terraform’s public representations about UST’s stability, which relied on algorithmic mechanisms, were a critical factor in the US SEC’s findings against Tai Mo Shan. Any remaining funds deemed infeasible to distribute will be transferred to the United States Treasury. US SEC has ordered Tai Mo Shan to cease and desist from further violations of the registration and fraud provisions of the United States Securities Act of 1933.
US SEC Chair Gary Gensler emphasised the need for transparency and adherence to United States securities laws, stating that: “This case reminds us that, too many times in the crypto markets, we’ve seen significant investor losses due to fraud, here, the impact reverberated throughout the crypto markets, eventually costing the savings of countless investors. Regardless of the labels, crypto market participants should comply with the securities laws where applicable and not deceive the public. Otherwise, investors get hurt.”
(Source: https://www.sec.gov/files/litigation/admin/2024/33-11349.pdf, https://www.sec.gov/newsroom/press-releases/2024-212)
