June 13, 2024 at 15:30 GMTModified date: June 13, 2024 at 15:30 GMT
June 13, 2024 at 15:30 GMT

Terraform Labs settles fraud case with SEC for $4.5B

The $4.47 billion settlement consists of approximately $3.75 billion in disgorgement, over $460 million in prejudgment interest, and a $420 million civil penalty. 

Terraform Labs settles fraud case with SEC for $4.5B

The cryptocurrency firm behind the collapse of Luna tokens and TerraUSD has agreed to a $4.47 billion settlement with the US Securities and Exchange Commission (SEC).

On Wednesday, the SEC filed a “proposed final consent judgement“, requesting Judge Jed Rakoff of the US District Court for the Southern District of New York to approve the plan.

Terraform Labs was found liable for defrauding cryptocurrency investors, who suffered an estimated $40 billion loss when the firm’s tokens collapsed in 2022. This triggered a significant downturn impacting the entire crypto industry.

The proposed judgement covers Terraform and its founder, Do Kwon, and follows the trial that concluded on 5 April. This includes $4.05 billion in disgorgement plus interest and a $420 million civil fine.

However, due to Terraform’s bankruptcy filing in January, much of this sum is unlikely to be paid. Instead, it will be treated as an unsecured claim in the Chapter 11 case, where Terraform is currently liquidating.

Prohibitions and penalties

The $4.47 billion settlement consists of approximately $3.75 billion in disgorgement, over $460 million in prejudgment interest, and a $420 million civil penalty. 

According to the agreement, Terraform and its former CEO, Do Kwon, will be banned from trading in crypto assets, including all tokens within the Terra ecosystems. 

The SEC also prohibited Kwon from serving as an officer or director of a public company. He is required to pay $200 million to the Terraform bankruptcy estate, to be distributed to affected investors.

The SEC’s filing stated: “The proposed consent judgement both addresses the magnitude of this fraud by imposing significant remedial, punitive, and deterrent remedies, including a multi-billion-dollar judgement against defendants”. 

Impact on investors

According to the SEC, the judgement would ensure maximum return of funds to harmed investors and effectively put the company out of business. 

Terraform and Kwon consented to the judgement, but their lawyers did not immediately respond to requests for comment.

From April 2018 to May 2022, Terraform Labs and Kwon are known to have raised billions by trading interlinked digital securities, many of which were not properly registered with regulators. These included TerraUSD, a digital asset invented by Kwon.

The SEC then accused Terraform and Kwon of misleading investors about the stability of TerraUSD, which was designed to maintain a constant $1 price, and falsely claiming that Terraform’s blockchain was used in a popular Korean mobile payment app. 

TerraUSD and the related token Luna collapsed in May 2022 when TerraUSD failed to maintain its dollar peg. 

Following this, Kwon was also found guilty in the fake passport case last year and was sentenced to four months in jail by the Montenegro court, along with his associate and Terra executive, Han Chang-Joon, 

In the recent filing, the SEC emphasised that the penalties fall within statutory limits and are intended to send a clear deterrent message. They also aim to provide a speedy recovery for investors who lost funds in the $40 billion collapse of the TerraUSD digital tokens in 2022.

Lawyers for the SEC urged Judge Jed Rakoff to approve the settlement agreement, which they believe will serve as a strong deterrent against similar fraudulent schemes in the future.

“Entry of this judgement would ensure the maximal return of funds to harmed investors and put Terraform out of business for good. Thus, this proposed judgement is fair, reasonable and in the public interest”, emphasised the SEC in a court filing.