Todd Snyder, the designated prosecutor by the Justice to conduct the closure of Terraform Labs, has filed a lawsuit against Jump Trading in a federal court in the United States. He accuses the company of having obtained illicit gains and of having played a significant role in the collapse of the Terra (LUNA) ecosystem.

The lawsuit was filed on Thursday in the Northern District of Illinois and seeks compensation of $4 billion from Jump Trading, its co-founder William DiSomma, and the former president of Jump Crypto, Kanav Kariya.

According to Snyder, Jump allegedly made secret agreements with Terraform that enabled them to extract billions of dollars while helping to mask vulnerabilities of TerraUSD (UST), the algorithmic stablecoin that was at the center of the crisis.

Terraform Labs confirmed the action this Friday (19), emphasizing that the goal is to hold Jump accountable for profits obtained through market manipulation, self-dealing, and misuse of assets, in addition to recovering amounts for creditors and holding the company accountable for exploiting the ecosystem, leaving investors with losses.

Impact and domino effect

The collapse of Terraform Labs began in May 2022, when TerraUSD lost its peg to the dollar, triggering a massive liquidation that resulted in losses exceeding $40 billion between TerraUSD and LUNA. The episode triggered a crisis that spread across the crypto sector, contributing to various bankruptcies and culminating in the collapse of the FTX exchange.

In January 2024, Terraform Labs filed for bankruptcy and later agreed to pay around $4.5 billion to settle a civil fraud lawsuit brought by the SEC.

According to the complaint cited by the Wall Street Journal, the partnership between Jump and Terraform began in 2019, with contracts that allowed Jump to purchase large amounts of LUNA at reduced prices.

The accusation also states that, in May 2021, Jump allegedly made a 'gentlemen’s agreement' to sustain the peg of TerraUSD by purchasing tens of millions of tokens during a de-pegging episode. Publicly, Terraform and Jump claimed that the recovery demonstrated the effectiveness of the algorithmic model of TerraUSD, but in practice, it was Jump's actions that restored the peg.

After this event, Jump allegedly renegotiated its contracts with Terraform, eliminating vesting restrictions and accelerating the release of LUNA tokens, which were resold at a significant profit.

Snyder argues that Jump made billions of dollars by trading LUNA acquired at a discount.

Do Kwon, co-founder and former CEO of Terraform Labs, was the architect of the algorithmic system that sought to keep TerraUSD pegged to the dollar through its connection with LUNA. This month, he was sentenced in the U.S. to 15 years in prison and may still face additional criminal charges in South Korea.