SEC Reaches $10 Million Settlement with MyConstant Founder Over Misuse of Funds and TerraUSD Investments

The U.S. Securities and Exchange Commission (SEC) has finalized a settlement with MyConstant's founder, Huynh Tran Quang Duy, imposing penalties exceeding $10 million. This action stems from the misuse of investor funds and misleading claims regarding the company's crypto lending services.

Key Takeaways

The SEC has settled with MyConstant's founder, requiring over $10 million in penalties.
MyConstant misled investors about the security of its lending services and the use of their funds.
The founder diverted funds into personal accounts and high-risk investments, causing substantial losses.
MyConstant's operations ceased following the collapse of TerraUSD (UST) in May 2022, which led to significant investor losses.
The SEC's settlement may pave the way for restitution to affected investors.

SEC Reaches $10 Million Settlement with MyConstant Founder Over Misuse of Funds and TerraUSD Investments

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The United States Securities and Exchange Commission has finalized a settlement with the founder of MyConstant, requiring him to pay over $10 million in penalties and restitution. This stems from allegations of misusing investor funds and making false claims about the platform's cryptocurrency lending services.

MyConstant was a peer-to-peer lending platform operating under the name Const LLC. Established in 2018 by Huynh Tran Quang Duy, or Duy Huynh, the platform claimed to provide high-yield investment opportunities by connecting lenders with borrowers through loans backed by cryptocurrency.

The platform promised annual returns ranging between 6% and 10%, marketing its products as low-risk and secured by cryptocurrencies. It primarily targeted U.S. investors, successfully attracting over $20 million from more than 4,000 individuals from 2020 to 2022.

However, despite presenting itself as a crypto-collateralized loan matching service, MyConstant pooled investor funds and maintained full control over their allocation. The SEC found that the company did not consistently issue loans supported by cryptocurrency collateral as advertised. Instead, Huynh misappropriated a significant portion of the funds for personal expenses and invested in high-risk crypto assets, violating the commitments made to investors.

He created fabricated loan summaries and marketing updates to uphold investor confidence and encourage reinvestment. The SEC discovered that Huynh misappropriated around $415,000 for personal use and allocated at least $11.9 million of investor funds to purchase TerraUSD (UST), an algorithmic stablecoin. This action contradicted MyConstant’s declared business model and risk profile.

When UST collapsed in May 2022, Huynh faced a loss of nearly $8 million in customer funds. Yet, he continued to mislead investors about the platform's stability by providing deceptive performance reports that suggested successful loan activities.

Huynh's purchase of UST seemed to be an attempt to deliver the high returns MyConstant had promised. At that time, TerraUSD offered returns up to 20% annually through Anchor Protocol, a decentralized finance (DeFi) platform associated with the Terra blockchain. However, UST's value relied on maintaining its peg to the U.S. dollar, supported by an algorithm tied to Terra’s native token, LUNA. A sudden market crash in May 2022 caused a depegging event, leading to the collapse of both tokens. MyConstant's exposure to UST became a significant liability, forcing the platform to cease operations by November 2022.

Before the SEC's investigation, MyConstant had already attracted scrutiny from state regulators. In December 2022, the California Department of Financial Protection and Innovation issued a cease-and-desist order against the firm, accusing it of violating California securities laws by offering unregistered interest-bearing crypto products and operating without a proper loan broker license.

By late 2022, MyConstant acknowledged it could no longer function as intended and suspended user withdrawals following a wave of market turbulence and customer redemptions. To date, the firm has returned $1.8 million to investors and has placed the remaining assets—estimated to be below $10 million—into a trust for potential recovery.

The SEC's settlement marks the first formal action that may facilitate broader restitution for the affected investors. According to the terms of the SEC order, Huynh is required to pay $8.3 million in disgorgement, $1.5 million in prejudgment interest, and a $750,000 civil penalty within 14 days. He agreed to the settlement without admitting or denying the SEC's allegations. In addition to these financial penalties, Huynh is prohibited from serving as an officer or director of any publicly registered company. The SEC may also establish a Fair Fund to distribute recovered funds to investors, contingent on feasibility.