Trial for fallen crypto tycoon begins, but he won’t attend
Do Kwon was arrested in Montenegro last year, is currently in an immigrant detention facility
Fallen crypto tycoon Do Kwon faces trial Monday on claims that he defrauded people who bought a cryptocurrency that collapsed two years ago, setting off a chain reaction that led to trading-firm failures and losses for investors around the world.
The Securities and Exchange Commission will open its civil case in Manhattan federal court against Kwon and his company, Terraform Labs, even though Kwon won’t be there.
Kwon was arrested in the Balkan country of Montenegro last year and he is currently in an immigrant detention facility pending the outcome of extradition proceedings.
Both South Korea and the U.S. are seeking to extradite him to face criminal charges.
That drama hasn’t stopped the SEC from pursuing Kwon, who was one of crypto’s wealthiest figures as recently as two years ago. He created and sold two major cryptocurrencies: TerraUSD, a so-called stablecoin, and Luna.
Kwon marketed TerraUSD and Luna as part of a protocol that would always keep the former coin pegged to $1. When TerraUSD fell below $1, traders could buy it at a discount and exchange it for $1 worth of Luna, Kwon’s other crypto invention. The TerraUSD coins would be destroyed as part of the exchange, reducing its supply and bringing its price back up to $1—at least in theory.
Kwon was known his provocative comments on Twitter, now X, demeaning his critics as dumb and poor. His backers included crypto evangelist Mike Novogratz, who got a tattoo of a wolf howling at a yellow moon. “I’m officially a Lunatic!!!” he wrote about the art on his arm.
Kwon’s crypto system crashed in
May 2022 when TerraUSD fell well below $1. Because traders had pledged it as collateral in borrowings, the collapse set off a contagion that roiled crypto markets for months and contributed to the failures of hedge funds, lenders and other firms, including Sam Bankman-Fried’s Alameda Research and FTX.
Kwon’s trial in U.S. District Judge Jed Rakoff’s court may take as long as two weeks. Jury selection begins Monday. If a jury finds him liable of defrauding investors, the SEC would be able to seek a hefty fine. Terraform has separately filed for bankruptcy and asked a separate court to shield it from financial penalties imposed through the SEC’s enforcement action.
The SEC sued in February 2023, accusing Kwon and Terraform of lying to investors about how TerraUSD was restored to its $1 peg after falling below the threshold.
U.S. high-speed trading firm Jump Trading was involved in the rescue, and some Terraform employees said behind the scenes that Jump saved TerraUSD, according to court records. But Kwon told investors it was because the mechanism between TerraUSD and Luna worked.
Withholding information about Jump’s involvement constituted civil fraud, the SEC says. Jump made some $1 billion in profit through its dealings with Terraform, according to the SEC.
Kwon and Terraform have said his statements didn’t mislead investors about how the relationship between TerraUSD and Luna worked.
The SEC’s fraud claim relies on testimony from Jump whistleblowers, according to a pretrial order that Rakoff issued in December. One whistleblower heard one of Jump’s co-founders say the trading firm was willing to risk about $200 million to save TerraUSD’s $1 peg, according to court records.
The SEC may call one of Jump’s founders, Bill DiSomma, as a witness, according to court records.
DiSomma declined to answer the SEC’s questions during the agency’s investigation, citing his Fifth Amendment right against self-incrimination, court records say.
The SEC also alleges that Terraform and Kwon repeatedly misled investors that a Korean electronic mobile-payment application, Chai, used Terraform’s blockchain technology to process and settle transactions.
An attorney for Kwon and a spokeswoman for Jump declined to comment.
The lawsuit has already paid dividends for the SEC’s broader crackdown on crypto.
Rakoff, who will preside over the trial, ruled in December that TerraUSD and Luna were investment contracts, a type of security the SEC regulates. The SEC can use Rakoff’s decision to try to persuade other courts where it is suing crypto defendants that their assets are securities.
Companies that sell securities to public investors must register the sales with the SEC and provide investors with standardized financial and risk disclosures. Kwon and Terraform, like most crypto developers, didn’t do that.
Alexander Osipovich and Marko Vešović contributed to this article.
Investors looking to ride the artificial-intelligence wave have turned their eyes to a sleepier corner of the market— companies that own and operate power plants. Is the run-up justified?
AI hype has helped lift Vistra stock 85% year to date. That falls short of Nvidia’s eye-watering 92% surge, but is far greater than the 12% lift that Microsoft has seen over that time. Constellation Energy, the owner of the U.S.’s largest fleet of competitive nuclear generation capacity, has rallied 60% year to date, while NRG Energy is up 32%.
U.S. electricity demand has been relatively flat since 2010, thanks to energy efficiency. Now, the prospect of data-center growth due to AI, as well as a Chips Actdriven nearshoring of manufacturing and the electrification of things like heating and transportation, are expected to drive electricity demand growth.
McKinsey, BCG and S&P Global Commodity Insights all project electricity demand tied to data centers to increase at a compound annual growth rate of between 13% and 15% through 2030. PJM Interconnection, whose jurisdiction includes data center-heavy Virginia, expects total electricity demand to grow at an annual rate of 2.4% over the next 10 years, up from its year-ago forecast of 1.4%.
This comes as the U.S. power market has been tightening for seven straight years, notes Steve Fleishman, equity analyst at Wolfe Research. Meanwhile, the time it takes for new capacity to go from the planning stage to commercial operation has only gotten longer as grid operators face long backlogs.
A nuclear-power purchase agreement announced earlier this month between Talen Energy and Amazon.com was a clear signal that clean, alwaysavailable power can command lofty rates. Based on the announced terms, Talen Energy appears to be getting at least a 50% premium over what its nuclear power plant would otherwise get in the power market today, according to estimates from Rodney Rebello, analyst for Reaves Asset Management, which manages a utilities-focused ETF.
Any company that is net long power—that is, those that have more capacity to sell power than the obligation to buy power (say, on behalf of retail energy customers)—are bound to experience tailwinds as power demand rises, notes Aneesh Prabhu, managing director at S&P Global Ratings. Few listed companies fall into this bucket, which might explain the concentrated rally. Vistra and Constellation are part of this club, as is NRG, though it has less generation capacity, according to Prabhu.
Kwon was known for provocative comments on Twitter, now X, demeaning his critics as dumb and poor
Data center growth due to AI, Chips Act-driven nearshoring of manufacturing may drive power demand growth
The first order impact is that any generator signing new power purchase agreements with data centers is likely to see a premium on the contracted prices. Those with clean, always-available nuclear power generation have a leg up here. Not only do nuclear power plants already have access to cooling water, but they also tend to be on large sites that make it feasible for companies to co-locate data centers (saving them the cost of connecting to the grid), according to a recent report from Morgan Stanley. In addition to Constellation and Vistra, PSEG has nuclear capacity suitable for data centers. As those contracts pull out existing capacity from the grid, any company that owns power generation should benefit from higher electricity prices.
Renewable and battery storage developers such as AES and NextEra Energy are likely beneficiaries, too, because nuclear generation alone won’t be enough to meet all data-center energy needs. Their shares haven’t rallied as much after jitters regarding high interest rates and supplychain bottlenecks.
Bloom Energy, provider of on-site fuel cell-powered electricity, is another potential beneficiary. And Quanta Services, which helps build transmission lines, has rallied 18% year to date. While regulated utilities won’t see the same kind of upside that unregulated power generators do, the rising investment needed in the grid will likely mean faster profit growth.
Anyone looking to profit off the AI theme would do well to keep a basket of electricity-exposed stocks in their basket.