Terraform Labs and Do Kwon to Pay $4.5B to Settle SEC Fraud Charges

A US District Court judge in the Southern District of New York has approved a settlement between the SEC, Terraform Labs, and its former CEO, Do Kwon.

A US District Court judge in the Southern District of New York has approved a settlement between the SEC, Terraform Labs, and its former CEO, Do Kwon.

The settlement mandates Terraform Labs and Kwon to pay USD 4.5 billion in disgorgement and civil penalties. Additionally, they are permanently prohibited from trading all 'crypto asset securities,' including Terra ecosystem tokens. The agreement follows a civil fraud finding against Terraform Labs and Kwon related to the collapse of the Terra ecosystem in May 2022, which resulted in significant financial losses for investors. Officials from the SEC emphasised that the economic substance of a product determines its classification under securities laws, highlighting the impact of non-compliance on investors.

The settlement, which is final and not subject to appeal, concludes a legal battle that included resistance from Terraform Labs and Kwon against investigative efforts, culminating in their agreement to the SEC's revised settlement offer of USD 4.5 billion. Kwon, currently detained in Montenegro pending extradition proceedings, was not present during the settlement agreement.

Terraform Labs, operating under Chapter 11 bankruptcy protection, faces financial uncertainty regarding the payment of the imposed fines, with reported assets of approximately USD 150 million.

Some background on Terraform’s fall

According to the Financial Times, between April 2018 and May 2022, Singapore-based Terraform and Kwon raised billions of dollars from investors by selling a number of interlinked digital securities, many of which were not properly registered with regulators, according to the SEC’s complaint.

Among those assets was TerraUSD, which is a stablecoin Kwon invented. The stablecoin crashed in 2022 alongside associated token luna and sent ripples through the crypto sector. Kwon is wanted by the US and South Korean authorities on separate criminal charges but remains in Montenegro amid a legal fight over his extradition. Kwon and his business are among the once high-flying crypto companies and executives targeted by US authorities, who say they are protecting investors according to the FT.