Terraform Labs’ liquidator targets Jump Trading in a staggering $4 billion damages claim.

In a significant legal move, the bankruptcy estate of Terraform Labs has filed a lawsuit against leading market maker Jump Trading, alleging secret manipulation of the Terra ecosystem during its catastrophic collapse. The suit demands $4 billion in damages, extending accountability beyond the firm’s founder, Do Kwon.

Collapse That Shook the Crypto World

The lawsuit revisits the dramatic downfall of TerraUSD and its paired token, LUNA, in 2022. Terraform Labs introduced TerraUSD as an algorithmic stablecoin, intended to maintain a dollar peg without relying on reserves. However, when this mechanism failed, confidence evaporated overnight.

Within days, LUNA fell into a death spiral, erasing over $40 billion in market value and causing ripples throughout the digital asset industry. The fallout contributed to the collapse of major cryptocurrency lenders and hedge funds, deepening a crisis of trust in the sector.

Terraform Labs filed for bankruptcy in early 2024, later agreeing to pay approximately $4.5 billion to settle civil lawsuits from the U.S. Securities and Exchange Commission (SEC). Do Kwon, the company’s co-founder, pleaded guilty to criminal charges and was sentenced to 15 years in prison.

Behind-the-Scenes Agreements

The bankruptcy estate claims that the story does not end with Kwon. Todd Snyder, the court-appointed administrator for the liquidation, asserts that Jump Trading played a hidden yet pivotal role in propping up Terra long before its final collapse.

Legal documents allege that Jump and Terraform entered undisclosed agreements as early as 2019, granting Jump access to millions of Luna tokens at significantly reduced prices. One cited agreement allowed the company to buy LUNA for approximately $0.40 per token, even as market prices soared past $110.

The administrator contends these arrangements set the stage for massive profits once LUNA’s value skyrocketed. The lawsuit also refers to an informal “gentleman’s agreement” between Jump and Terraform. According to Snyder, Jump secretly committed to supporting TerraUSD’s position during times of stress, while Terraform publicly attributed any recovery to its algorithm’s strength, all to evade regulatory scrutiny.

Warning Signs in May 2021

The lawsuit emphasizes events from May 2021 when TerraUSD briefly lost its dollar peg. At that time, Terraform claimed that the stablecoin’s recovery demonstrated the resilience of its design. The suit now suggests a different narrative.

Snyder claims that Jump intervened by purchasing large quantities of TerraUSD, masking fundamental weaknesses within the system. He argues that this misled investors into believing the mechanism functioned as intended.

After this episode revealed flaws in Terra’s design, Jump reportedly negotiated the removal of vesting and lock-up clauses from its contracts, allowing the company to receive monthly LUNA allocations and sell them immediately. Snyder argues this intensified selling pressure and positioned Jump to profit as risks escalated.

Jump Trading’s Rejection of Allegations

Jump Trading has firmly denied these allegations and intends to mount a vigorous defense. A spokesperson described the lawsuit as a misguided attempt to deflect responsibility away from Terraform Labs and Do Kwon.

Earlier in 2024, the SEC accused Jump’s cryptocurrency unit, Tai Mo Shan, of intervening during the May 2021 debacle and profiting from the unblocking of LUNA sales. Tai Mo Shan settled these claims for approximately $123 million, without admitting any wrongdoing.

During SEC interrogations, both DiSomma and former Jump Crypto president Kanav Kariya invoked their Fifth Amendment rights repeatedly. According to Snyder, the current trial is focused on accountability. Despite Kwon’s imprisonment, he argues that courts still need to ascertain who knew what, who intervened, and who ultimately profited from Terra’s rise and fall.