In a landmark settlement, Terraform Labs, the company led by disgraced crypto mogul Do Kwon, has consented to pay the U.S. Securities and Exchange Commission (SEC) just under $4.5 billion to settle a civil securities-fraud lawsuit. This agreement, announced on Wednesday, also involves the winding down of the company’s operations, marking one of the largest penalties in the history of securities fraud.
Do Kwon himself has agreed to a personal penalty of $204 million. The former CEO, who was apprehended last year in Montenegro, remains in immigration detention as both the United States and South Korea seek his extradition. The settlement, pending court approval, is a significant milestone for global regulatory authorities striving to hold Kwon accountable for the catastrophic collapse of his TerraUSD and Luna cryptocurrencies in May 2022.
However, the SEC might face challenges in securing the full penalty amount. Terraform Labs is currently undergoing bankruptcy proceedings and has declared assets of less than half a billion dollars. This financial shortfall raises questions about the actual amount the SEC will recover from the penalty.
The 2022 crash of TerraUSD and Luna resulted in an estimated $40 billion loss in the digital-currency markets, devastating the investments of thousands worldwide. Kwon, who had aggressively promoted these cryptocurrencies, infamously mocked his detractors on social media, dismissing them as “idiots” and refusing to engage with those he deemed “poor.”
Following a two-week civil trial, a New York jury found Kwon and Terraform Labs liable for securities fraud in April. The SEC’s enforcement action is part of its extensive campaign to impose order on the largely unregulated cryptocurrency market. In a letter to U.S. District Judge Jed Rakoff, the SEC characterized the multibillion-dollar penalty as a fitting response to “one of the largest securities frauds in U.S. history.”
“If approved, the proposed judgment will send an unmistakable deterrent message to not only those who engage in brazen misconduct but also to all those who seek to evade the requirements of the federal securities laws by crafting new standards of behavior for crypto assets that fall under the purview of the federal securities laws,” the SEC stated.
Terraform Labs filed for bankruptcy in January, anticipating severe financial repercussions if it lost the fraud trial. An April 30 court filing revealed the company held $430.1 million in assets against $450.9 million in liabilities. Even if Terraform’s bankruptcy estate manages to allocate funds for the SEC penalty, the agency would still have to wait behind other creditors. The penalty would be classified as a general unsecured claim, with higher-priority creditors receiving payment first.
The settlement signifies Terraform’s capitulation. After its trial loss, the company argued for a minimal penalty of $1 million, while the SEC demanded $5.3 billion, primarily representing profits from TerraUSD and Luna sales before their crash. Terraform has also agreed to waive its right to appeal the judgment.
Under the terms of the settlement, Kwon will transfer $204 million directly to Terraform’s bankruptcy estate for distribution to defrauded investors. Meanwhile, in a parallel case, federal prosecutors in New York have charged Kwon with eight counts of criminal fraud. Kwon continues to deny all allegations of fraud.
Terraform Labs’ dramatic fall from grace underscores the volatile and often perilous nature of the cryptocurrency market, highlighting the urgent need for stringent regulatory oversight and accountability.
