The collapse of TerraUSD in May 2022 was one of crypto’s most spectacular disasters, wiping out roughly $40 billion in value. Now, bankruptcy court filings allege that one of Wall Street’s most sophisticated trading firms saw it coming, and not by accident.

Jane Street, the quantitative trading powerhouse, allegedly sold approximately $193 million worth of UST on May 7, 2022, just before the stablecoin lost its dollar peg and spiraled toward zero. The firm then reportedly profited around $134 million by shorting the token as the broader Terra ecosystem imploded. The allegations stem from filings in the Terraform Labs bankruptcy case.

The Telegram trail

At the center of the allegations is a private Telegram group reportedly called “Bryce’s Secret.” The group is linked to a former Terraform Labs intern and allegedly served as a communication channel between Jane Street and Terraform insiders.

On May 7, 2022, Terraform Labs withdrew $150 million in UST. Shortly after, Jane Street reportedly withdrew $85 million in UST. The proximity of those two withdrawals, combined with the alleged Telegram connection, forms the backbone of the insider trading claim.

Jane Street’s defense

Jane Street has firmly denied any wrongdoing. The firm contends that every trade it executed was based solely on publicly available information, not whispers from a private chat group.

Beyond the factual denial, Jane Street has mounted a legal defense that goes after the very foundation of the case. The firm argues that the lawsuit is essentially an attempt to extract funds to cover Terraform Labs’ own fraud. Jane Street has also challenged US jurisdiction over the matter and invoked the Wagoner rule, a legal doctrine that generally prevents a bankrupt entity’s estate from suing third parties for harm that the debtor itself caused or participated in.

Why this matters beyond the courtroom

The Terra collapse was a defining moment for crypto regulation. Terraform Labs filed for Chapter 11 bankruptcy in January 2024. Terraform Labs founder Do Kwon was eventually arrested, extradited, and faced fraud charges. The SEC won a civil case against Terraform Labs itself.

The case also raises questions about the role of Telegram groups in crypto deal-making. The allegation that a group tied to a former Terraform intern served as a pipeline for material non-public information highlights how porous the walls between insiders and traders can be in this industry.

The key variable is whether the bankruptcy court finds the Telegram connection substantive enough to overcome Jane Street’s jurisdictional and legal challenges. If the Wagoner rule defense succeeds, the case could be dismissed before the insider trading allegations are ever tested on the merits.