Terraform Labs has initiated legal action against Jane Street, one of the largest trading firms on Wall Street, alleging that the firm utilized insider knowledge obtained from a private Telegram group chat to offload its holdings in TerraUSD (UST) just before its price collapse.

Allegations of Improper Conduct by Jane Street

In an updated legal complaint filed recently, Todd Snyder, a representative of Terraform Labs, accused Jane Street along with its co-founder Robert Granieri and traders Bryce Pratt and Michael Huang of manipulating market prices using information from non-public sources. This information allegedly allowed them to execute trades that contributed to Terraform’s financial downfall.

The original lawsuit, filed in February, claims that these individuals misappropriated sensitive information, which led to significant market manipulation.

According to the complaint, Jane Street reportedly set up a secret group chat—dubbed “Bryce’s Secret”—to access this insider information. This group was allegedly named after Pratt, who was a former intern at Terraform and later joined jane Street.

The group chat, established on February 22, 2022, was not just limited to Pratt but also included two former Terraform colleagues, including the company’s Head of Business Development.

In the months leading up to UST’s collapse, Pratt allegedly sought insights from Terraform team members regarding decentralized finance (DeFi) information, strategies, and liquidity needs, providing Jane Street with a strategic advantage in the market.

Using this insider intelligence, Jane Street sold its UST holdings on May 7, 2022, an action that the Terraform estate claims was calculated to maximize their profits while minimizing potential losses.

Shortly after this liquidation, UST depegged from its $1 value, initiating a downward spiral for Terraform’s ecosystem, including both UST and Luna cryptocurrencies. The complaint further alleges that Jane Street capitalized on this situation by taking short positions in both UST and Luna, leading to significant profits from the decline they allegedly helped instigate.

Ultimately, Jane Street exited its position in UST, valued around $193 million, and reportedly earned an additional $134 million from its short positions, according to Terraform’s claims.

Implications of Insider Trading on UST’s Collapse

The lawsuit emphasizes that Jane Street’s decisions to liquidate their entire UST holdings in a single day severely impacted Terraform and its investors. The complaint suggests that had Jane Street not entered the market in such a manner, the rapid depeg of UST and the subsequent “death spiral” might not have occurred.

As a result of these allegations, Terraform is seeking a court ruling to find Jane Street liable for violating the Commodities Exchange Act. They request that the court award damages equivalent to the profits Jane Street gained and the losses the firm avoided through its alleged market manipulation.

In response, Jane Street filed a motion to dismiss the lawsuit in April, contending that Terraform’s claims were an attempt to divert blame for its own actions onto the trading firm. Jane Street asserts that their transactions occurred after the negative information about UST and Luna had already been disclosed to the public.