April 23, 2024 at 10:20 GMTModified date: April 23, 2024 at 10:20 GMT
April 23, 2024 at 10:20 GMT

SEC seeks $5.3B from Terraform and executive ban on Do Kwon

The regulatory body has proposed barring Kwon from holding any executive role in the securities industry and mandates a full disclosure of his financial dealings and assets.

SEC seeks $5.3B from Terraform and executive ban on Do Kwon

Following a decisive jury verdict, the United States Securities and Exchange Commission (SEC) has intensified its legal actions against Terraform Labs and its co-founder, Do Kwon.

The SEC’s motion, filed in the US District Court for the Southern District of New York on 19 April, called for a staggering $5.3 billion in total penalties.

This comprises $4.7 billion in disgorgement and prejudgment interest, and an additional $520 million in civil penalties—$420 million against Terraform Labs and $100 million against Kwon personally.

Diverging penalty proposals 

Contrasting sharply with the SEC’s substantial financial demands, Terraform Labs has proposed a much more modest settlement of $3.5 million, while Kwon has suggested a mere $800,000. 

These figures are part of their legal strategy to mitigate financial repercussions. Furthermore, the SEC is pushing for significant operational restrictions on Kwon and his company.

The regulatory body proposed barring Kwon from holding any executive role in the securities industry and mandates a full disclosure of his financial dealings and assets. 

For Terraform Labs, a conduct-based injunction is suggested to forestall any repeat of the fraudulent activities that precipitated their legal troubles.

Calls for accountability

The SEC’s filing underscored a perceived lack of remorse from Kwon and his firm, positing that further violations are likely already occurring. 

The regulatory filings are explicit in their intent to set a stern precedent against such “brazen misconduct”, especially against the backdrop of new, self-fashioned rules in the crypto markets that contravene established federal securities laws. 

The case’s outcome is poised to be a landmark in the enforcement of securities regulations within the volatile cryptocurrency sector.

The charges against Terraform Labs and Do Kwon originated from accusations of misleading investors about the security and stability of their digital currencies, such as TerraUSD ($UST), Luna, and wrapped Luna ($wLUNA). 

These allegations were catalysed by the dramatic collapse of these tokens in 2022, which triggered widespread market turmoil and significant financial losses for investors. 

Kwon’s legal troubles 

Do Kwon’s legal saga extends beyond US borders. After his arrest in Montenegro in March 2023 for using falsified travel documents, Kwon faces the prospect of extradition to either the United States or South Korea, with both nations eager to prosecute him for additional criminal charges. 

His ongoing detention and the international legal proceedings exemplify the complex, cross-border legal challenges posed by the global nature of cryptocurrency operations and the alleged misconduct.

This case not only emphasises the SEC’s commitment to upholding securities laws but also serves as a critical warning to other crypto enterprises about the severe consequences of misleading investors and circumventing regulatory standards. 

In October of last year, Terraform Labs co-founder Daniel Shin pointed to fellow co-founder Do Kwon as responsible for the collapse of the stablecoin issuer during his trial. South Korean authorities later indicted Shin in April 2023 on capital-markets law violations and other charges. 

Shin’s lawyer, Kim Ji-dong, asserted that Shin had left the company two years before its failure and was not involved in the collapse. Kim also noted that Shin had “voluntarily returned to South Korea immediately after the collapse and has been actively cooperating with the investigation for over 10 months”.

At his hearing, Shin’s legal team reiterated that he had severed ties with Kwon back in 2020, claiming “the drop in the coin’s value was due to mismanagement of the Anchor Protocol by CEO Kwon and external pressures, unrelated to Shin”. 

Anchor Protocol, a decentralised savings platform, provides stable returns on Terra stablecoin deposits and allows borrowing against cryptocurrency holdings.

The downfall of Terra was primarily due to its algorithmic stablecoin, terraUSD, losing its 1:1 peg with the US dollar, exacerbated by Anchor’s reduction of interest rates on crypto deposits from 20%. 

As terraUSD faltered, investors rapidly withdrew from Anchor, deepening the crisis and sparking widespread bankruptcies across the cryptocurrency markets, including those of hedge fund Three Arrows Capital, and lenders Voyager Digital and Celsius Network.

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