This Broker Sued for Insider Trading, Causing Crypto Coin Collapse

Jakarta, CNBC Indonesia - One US-based trading firm, Jane Street, stands accused of illegally profiting and hastening the downfall of the Terraform crypto empire. For this, it faces a lawsuit in a US court over alleged insider trading.

Citing The Wall Street Journal, Todd Snyder, the US court-appointed administrator, has filed a damages claim against Jane Street, one of its founders Robert Granieri, and employees Bryce Pratt and Michael Huang. The lawsuit was lodged in the federal court in Manhattan.

In the heavily redacted lawsuit documents, Snyder accuses Jane Street of using material non-public information from Terraform insiders to engage in front-running trades. This action is said to have accelerated Terraform’s destruction.

Terraform collapsed in May 2022 when the cryptocurrency TerraUSD lost its peg to the US dollar. Its sister token, Luna, also plummeted close to zero in just a few days following the de-peg.

The $40 billion collapse harmed hundreds of thousands of investors worldwide, with some losing their life savings almost overnight. The event also triggered a domino effect that toppled several crypto firms, ultimately leading to the collapse of Sam Bankman-Fried’s exchange FTX.

Terraform filed for bankruptcy in January 2024, and an official liquidation trust was established at the end of that year. Do Kwon, Terraform’s founder since 2018, is now serving a 15-year prison sentence after pleading guilty to two criminal charges last August.

“Jane Street abused market relationships to manipulate the market for its own benefit in one of the most consequential events in crypto history,” Snyder said in a statement. He affirmed that his team would pursue all legal avenues for the benefit of Terraform’s creditors.

In response to the lawsuit, a Jane Street spokesperson described it as a desperate attempt to extract money. The firm attributes the losses to Terra and Luna holders to alleged massive fraud by Terraform Labs’ management and vows to fight the claims.

According to the lawsuit, Jane Street registered to trade directly with Terraform by the end of 2018, but its activities ramped up in February 2022. At that time, Jane Street sent Bryce Pratt, a former Terraform intern, to build communication channels with his former colleagues.

One of Pratt’s communications was creating a group chat named “Bryce’s Secret” with former Terraform colleagues. The group is alleged to have been used to funnel Terraform-related information back to Jane Street.

After Pratt introduced Terraform’s head of business development to Jane Street’s DeFi lead via email, the two sides began regular communication. However, the lawsuit accuses Jane Street of exploiting this communication as a source of secret information to maximise trading profits.

Specifically, on 7 May 2022 at 17:44 EST, Terraform withdrew 150 million TerraUSD from Curve3pool. Less than 10 minutes later, a crypto wallet linked by several analysts to Jane Street withdrew 85 million TerraUSD from the same pool before the information was publicised.

The following day, Kwon stated that the 150 million withdrawal was intended to move TerraUSD to a new liquidity pool. However, the exact timing of activities related to the new pool was not publicly known, according to the lawsuit.

This lawsuit emerges two months after the Terraform administrator also sued Jump Trading, which is alleged to have had a secret agreement to support TerraUSD before the collapse. That firm is said to have later reaped billions in profits from Terraform’s downfall.

After the 7 May transaction, Jane Street is alleged to have continued using secret information, including that obtained from Jump Trading, to amplify profits. On 9 May, when TerraUSD had de-pegged but not fully collapsed, Pratt created a group message with Kwon, Huang, and Jane Street parties to express interest in buying bitcoin or Luna tokens.

Jane Street is also known as the early career launchpad for Bankman-Fried and Caroline Ellison before they founded Alameda Research and FTX. This connection has come under renewed scrutiny amid growing oversight of trading practices in the crypto industry.