Terraform Labs and Do Kwon to Pay $4.5 Billion in SEC Fraud Settlement

Terraform Labs, the cryptocurrency firm behind the infamous TerraUSD collapse in 2022, has agreed to a monumental $4.5 billion settlement with the U.S. Securities and Exchange Commission (SEC). This resolution follows a New York jury’s decision, which found Terraform Labs and its co-founder, Do Kwon, liable for orchestrating a massive cryptocurrency fraud that led to billions in investor losses.

The SEC’s proposed settlement, filed in the Manhattan federal court, stipulates that Terraform Labs will pay $3.59 billion in disgorgement plus interest and a $420 million civil penalty. Do Kwon, individually, will be responsible for $204 million, including $110 million in disgorgement, interest, and an $80 million penalty. This agreement comes after months of legal wrangling, culminating in a jury verdict that held Terraform and Kwon accountable for misleading investors about the stability and security of TerraUSD, an algorithmic stablecoin designed to maintain a constant $1 price.

Terraform Labs’ meteoric rise and dramatic fall have been a central narrative in the cryptocurrency world. Founded in Singapore, the company attracted billions from investors by promoting a range of digital securities. However, many of these securities were not properly registered, a point emphasized by the SEC’s complaint. The collapse of TerraUSD and its associated token, Luna, in May 2022, resulted in a devastating $40 billion loss for investors, sending shockwaves through the crypto sector and leading to a broader market downturn.

The settlement marks a significant victory for the SEC in its ongoing efforts to regulate the volatile cryptocurrency market and protect investors from fraudulent schemes. The proposed judgment also includes a critical provision barring Terraform Labs and Do Kwon from engaging in any future crypto asset securities transactions, effectively shutting down their operations.

In addition to the financial penalties, Terraform must seek approval for a Chapter 11 liquidation plan in its separate bankruptcy case in Delaware. This plan involves replacing the current company directors and appointing a trustee or estate representative to manage the remaining assets and ensure that creditors and investors receive the maximum possible return.

The SEC’s enforcement action against Terraform and Kwon is part of a broader crackdown on high-profile crypto companies and their executives. Notably, the founder of FTX, Sam Bankman-Fried, was sentenced to 25 years in prison for fraud, while Binance’s Changpeng Zhao received a four-month jail sentence and the exchange paid $4.3 billion in fines for regulatory violations.

The jury’s verdict in the Terraform case centered on allegations that Kwon and Terraform Labs misled investors by falsely claiming that Chai, a popular Korean payment application, was using Terraform’s blockchain technology. Furthermore, they were found to have made deceptive statements about the stability of the UST stablecoin, which was supposed to be algorithmically pegged to the US dollar. This misrepresentation led to significant financial losses when TerraUSD lost its peg, triggering a collapse in the Terra ecosystem.

Do Kwon, who owns 92% of Terraform, has been embroiled in legal battles across multiple jurisdictions. He was arrested in Montenegro in 2023 for attempting to travel with a fake passport and is currently facing extradition requests from both the United States and South Korea to face criminal charges related to the Terra collapse. The SEC’s civil case is part of a broader set of legal challenges he faces.

The SEC’s proposed judgment, if approved, aims to provide a measure of restitution to the investors who suffered significant losses due to Terraform’s fraudulent activities. It also serves as a stern warning to the cryptocurrency industry about the severe consequences of violating federal securities laws. The settlement emphasizes the SEC’s commitment to enforcing compliance and protecting investors in an industry often marked by rapid innovation and regulatory challenges.

This case underscores the importance of regulatory oversight in the cryptocurrency market and highlights the need for companies to adhere strictly to legal standards to avoid similar pitfalls. As the crypto industry continues to evolve, regulatory bodies like the SEC will likely play an increasingly pivotal role in ensuring market stability and investor protection.