Terraform Labs Sues Liquid Leap Trading for $4B in Damages

Terraform Labs has alleged that Jump UST is secretly misleading the markets. Court records show Jump earned billions in discounted Luna deals and early exits. When US courts revisited liability beyond Doe Kuhn, Jump dismissed the case.

The bankrupt estate of Terraform Labs has filed a sweeping lawsuit against marketing giant Jump Trading, alleging that it and its executives secretly ran the Terra ecosystem and profited from the project's unraveling.

The administrator that oversees Terraform Liquidity is seeking $4 billion in damages, saying responsibility for one of the crypto's most devastating failures extends beyond founder Do Kwon.

The failure that changed cryptocurrency

The lawsuit retraces the dramatic implosion of TerraUSD and its sister token Luna in 2022.

Terraform Labs built TerraUSD as an algorithmically stable coin to maintain a dollar peg through trade incentives, rather than relying on reserves.

When that tactic failed, confidence evaporated overnight.

Within days, LUNA went into a death spiral and more than $40 billion in market value was wiped out, sending shockwaves through the digital asset industry.

The collapse contributed to subsequent collapses in major cryptocurrency lenders and hedge funds, ultimately exacerbating a crisis of confidence in the sector.

Terraform Labs filed for bankruptcy in early 2024 and later agreed to pay around $4.5 billion to settle civil charges filed by the US Securities and Exchange Commission (SEC).

The company's founder, Do Kwon, was charged with a crime and was recently sentenced to 15 years in prison.

Secret offers behind the scenes

According to the bankruptcy estate, the story didn't just end with Coon.

Court-appointed administrator Todd Snyder, who is managing Terraform's liquidation, says Leap Trading played a hidden and central role in growing Terra long before its final collapse.

Court filings say Leap and Terraform entered into undisclosed agreements in 2019.

Through those deals, Jump reportedly got access to millions of Luna tokens at a steep discount.

One agreement cited in the complaint allowed the company to buy LUNA for $0.40 per token when the market price later exceeded $110.

The manager says these arrangements laid the foundation for big profits after Luna's addition.

The lawsuit also points to an informal “honorable persons agreement” between Jump and Terraform.

According to Snyder, when they secretly jumped in to support TerraUSD's peg in times of stress, Terraform publicly attributed any recovery to algorithmic strength.

The arrangement is said to be hidden to avoid regulatory and market scrutiny.

May 2021 warning signs

The lawsuit specifically focused on events in May 2021 when TerraUSD lost its dollar currency.

At that time, Terraform confirmed the stability of the stablecoin recovery design. The lawsuit now testifies to a different reality.

Snyder said Leap intervened by buying large amounts of TerraUSD, hiding fundamental weaknesses in the system.

Investors, he argues, were mistaken in thinking the strategy had worked as intended.

After that episode exposed flaws in Terra's design, Jump negotiated to remove wear and tear clauses from its contracts.

Those changes allowed the firm to receive monthly Luna allocations and sell them immediately.

The manager says this will intensify the selling pressure and jump to take profits as the risk increases.

Jump pushes back

Jump Trading has denied the allegations, and intends to vigorously defend itself.

A company spokesperson described the lawsuit as an attempt to incriminate Terraform Labs and Do Kwon.

Earlier in 2024, the SEC accused Tai Mo Shan of Jump's crypto division of interfering with Deepeg in May 2021 and later accusing him of profiting from open LUNA sales.

Tai Mo Shan settled those claims for $123 million without admitting wrongdoing.

During the SEC inquiry, both D'Soma and former Jump Crypto President Kanav Karia repeatedly invoked their Fifth Amendment rights.

For Snyder, the current lawsuit is a matter of accountability. Even after Kwon's prison term, the courts will have to decide who knew what, who interfered, and who ultimately benefited from Terra's rise and fall, they argue.