In a notable legal maneuver, Terraform Labs has initiated a lawsuit against the trading firm Jane Street, accusing it of leveraging insider information related to the tumultuous events of May 2022, which saw the collapse of TerraUSD (UST) and Luna. This litigation has significant implications for the cryptocurrency market and the trading practices of major firms.

Filed in Manhattan federal court by Todd R. Snyder, the appointed administrator for Terraform’s bankruptcy proceedings, the lawsuit targets Jane Street entities and individual traders, including Bryce Pratt. The allegations center on claims of insider trading, fraud, and market manipulation during a critical moment of liquidity challenges in the Terra ecosystem. The lawsuit seeks not only damages but also the disgorgement of profits, with recovered funds aimed at aiding creditors affected by the collapse.

Was Jane Street’s Involvement Key to the $40 Billion Crypto Downturn?

A focal point of the case is Bryce Pratt’s transition from an internship at Terraform to a position at Jane Street. The complaint suggests that he maintained an ongoing connection with Terraform insiders, effectively turning him into a potential conduit for confidential information. This relationship raises questions about ethical trading practices in times of crisis.

Text messages cited within the filing allegedly reveal discussions laden with confidential insights. Phrases like “don’t share pls” are indicative of an awareness surrounding the sensitivity of the information exchanged. Additionally, Terraform staff purportedly inquired about Jane Street’s internal dialogues, suggesting a close-knit relationship that may have granted Jane Street an unfair advantage.

This narrative posits that Jane Street was not merely acting as an aggressive trader in a bear market; rather, it implies that the firm had access to crucial information while the wider market relied on public trends and dwindling liquidity.

The central narrative of the lawsuit revolves around movements in liquidity, particularly during the UST depeg episode. Snyder asserts that following adjustments to Curve’s liquidity protocols, a significant trade linked to Jane Street — valued at 85 million UST — was executed, marking it as the largest swap on Curve’s 3pool. This trade is claimed to have been a catalyst for a significant decline in UST, contributing to the overall collapse of the Terra ecosystem.

As the situation escalated on May 8 and 9, UST experienced heightened trading volumes and rapidly declined below the $0.80 threshold, even as Terraform sought to stabilize the pegged value. The lawsuit aims to tightly connect access to confidential information with specific trading actions, thereby attributing damages to these alleged insider trading practices.

Further substantiating claims, the lawsuit references direct exchanges amidst the turmoil. In particular, a May 9 message from Pratt to Do Kwon proposed interest in acquiring Bitcoin or Luna, revealing Jane Street’s proactive approach during a crisis. Kwon’s response, referencing discussions with a colleague from another firm, further indicates that Jane Street was not merely an outside observer but was actively engaged with Terraform leadership during critical junctures.

Jane Street has firmly rejected these allegations, signaling an intent to mount a robust defense. As this litigation unfolds, pivotal questions will likely revolve around the materiality of the information in question, any causal links to the market collapse, and the challenge of proving intent behind the trades.

The broader cryptocurrency market continues to reflect considerable volatility, with the total market capitalization recently estimated at $2.17 trillion, underscoring the ongoing impacts of these unfolding legal battles.