Terraform Labs and Do Kwon Fined $4.5 Billion to Settle With SEC

Terraform Labs will pay the securities watchdog nearly $4.47 billion. The penalty includes disgorgement fines of around $3.6 billion, a civil penalty of $420 million, and nearly $467 million in prejudgment interest.

The U.S. Securities and Exchange Commission (SEC) has reached a final settlement with Terraform Labs and its co-founder Do Kwon in a fraud case related to the collapse of the Terra ecosystem, according to a court filing on Wednesday.

Terraform Labs will pay the securities watchdog nearly $4.47 billion. The penalty includes disgorgement fines of around $3.6 billion, a civil penalty of $420 million, and nearly $467 million in prejudgment interest.

On his part, Do Kwon is personally responsible for $110 million in disgorgement penalties and roughly $14.3 million in prejudgment interest, as per the settlement agreement.

The settlement follows a jury verdict holding Terraform Labs and Kwon accountable for the Terra ecosystem collapse, which resulted in a $40 billion loss for investors.

The settlement document states: “Payment of the monetary remedies against Kwon shall be deemed satisfied, provided that all transfers by Kwon to the SEC and the Terraform bankruptcy estate in the Bankruptcy Case total no less than $204,320,196, excluding the value of any Terraform Crypto Assets transferred to the Terraform bankruptcy estate, only if and until Kwon completes: (1) transferring into an escrow account agreed by Kwon and the Commission staff $4,700,000 within 30 days of Final Judgment.”

Additionally, the agreement mandates the transfer of all crypto assets from the Luna Foundation Guard and Kwon’s PYTH token holdings to cover the costs associated with the disgorgement fines and prejudgment interest. Any surplus from the sale of these assets will be used to offset the civil penalty fines.

The SEC had earlier sought to impose a $5.3 billion penalty, which would have been its largest fine yet on a cryptocurrency project.

Do Kwon is currently out on bail in Montenegro, awaiting extradition to either the U.S. or South Korea. He faces criminal charges in both countries. Kwon, who co-founded the algorithmic stablecoin Terra and its sister token LUNA, saw the Terra ecosystem collapse in May 2022, triggering widespread turmoil in the cryptocurrency industry.

The civil court jury in New York found Kwon and Terraform Labs liable for misleading customers regarding the safety of investing in their algorithmic stablecoin Terra USD (UST) and the utility of its underlying blockchain. Investors reportedly purchased over $2 billion worth of UST from exchanges and other trading venues.

The SEC defended its proposed fines as “conservative” yet “reasonable,” citing the massive profits Kwon obtained from Terraform’s stablecoin despite its eventual failure.

Terraform Labs was granted approval by court in March to cover legal expenses with its remaining funds.

The SEC has particularly taken issue with Terraform’s decision to hire the law firm Dentons, arguing that such a move is designed to shield funds from potential judgments in the lawsuit related to the collapse of TerraUSD.

Several enforcement authorities and financial regulators, including the Interpol, were already on the hunt for Kwon for his alleged involvement in the collapse of terraUSD (UST) stablecoin and the Terra ecosystem.