SEC Seeks $5.3 Billion in Penalties in Terraform Collapse Final Judgment

The Securities and Exchange Commission (SEC) has requested that a New York court impose a $5.3 billion penalty on Terraform Labs and its co-founder, Do Kwon, for their alleged role in the collapse of the Terra ecosystem. A Manhattan jury previously found the parties liable for misleading investors about the stability of Terra USD (UST) and Terraform Labs' blockchain applications. The SEC seeks $4.74 billion in disgorgement and prejudgment interest from Terraform Labs and Kwon, along with $420 million and $100 million in civil penalties, respectively.

SEC Files Final Judgment, Seeking $5.3 Billion in Penalties for Terraform Collapse

New York, NY – March 13, 2023 – The United States Securities and Exchange Commission (SEC) has filed a motion for final judgment in a federal court in New York, seeking $5.3 billion in disgorgement, prejudgment interest, and civil penalties against Terraform Labs and its co-founder, Do Kwon, for their alleged misconduct in the collapse of the Terra ecosystem in 2022.

Background

On February 15, 2023, a Manhattan jury found Terraform Labs and Kwon liable on civil fraud counts, concluding that they had misled investors about the stability of Terra USD (UST), a purportedly "algorithmic" stablecoin, and the applications for the Terra blockchain.

SEC's Request for Final Judgment

In its motion, filed two weeks after the trial, the SEC seeks the following remedies:

• Disgorgement: $4.74 billion from Terraform Labs and Kwon, representing their alleged ill-gotten gains.
• Prejudgment Interest: To be determined by the court.
• Civil Penalties: $420 million from Terraform Labs and $100 million from Kwon.

SEC's Allegations

According to the SEC, Kwon and Terraform Labs earned "over $4 billion in ill-gotten gains (and likely much more)" through their illegal conduct, which included:

• Misrepresenting the stability of UST as an "algorithmic" stablecoin, backed by a reserve of Bitcoin (BTC).
• Failing to disclose the risks associated with UST and the Terra blockchain, including the potential for a "death spiral" collapse.
• Manipulating the market for LUNA, the native token of the Terra blockchain, to artificially prop up the price of UST.

Court Documents

Court documents filed by the SEC show that between June 2021 and May 2022, investors purchased $2.3 billion worth of UST on various crypto asset trading platforms. Terraform Labs also sold $65.2 million worth of LUNA and $4.3 million worth of MIR tokens to institutional investors, and $1.8 billion worth of LUNA and UST through the Luna Foundation Guard (LFG).

SEC's Rationale for Penalties

The SEC argues that the requested fines are a "conservative" but "reasonable approximation" of Kwon's and Terraform's ill-gotten gains. The agency also seeks injunctions against Kwon and Terraform Labs, barring future securities violations and prohibiting any involvement with crypto asset securities. Additionally, Kwon faces an officer-and-director ban at SEC-reporting public companies.

The SEC deems these measures crucial for deterring future violations, citing defendants' lack of remorse and ongoing risk. Particularly concerning was Terraform Labs' CEO's testimony about ongoing token sales, raising doubts about compliance.

The SEC criticized Kwon's testimony as an admission of likely repeat offenses, describing it as audacious. They highlighted Terraform's distribution of a new token version, LUNA 2.0, to investors while continuing to spend millions from prior investments and engaging in further unregistered security distributions.

SEC's Message to the Industry

The SEC's latest action sends a clear message to the crypto asset industry that it will not tolerate fraud and abuse, and that companies and individuals responsible for such misconduct will be held accountable. The agency continues to monitor the evolving crypto asset market and will take appropriate enforcement actions to protect investors.