Terraform Labs and Do Kwon Settle SEC Fraud Charges for $4.5 Billion

The settlement, which Rakoff approved on June 13, will impose “significant remedial, punitive, and deterrent remedies, including a multi-billion dollar judgment” against the defendants.

Terraform Labs and its founder Do Kwon have agreed to pay nearly $4.5 billion to settle a Securities and Exchange Commission lawsuit accusing them of defrauding investors with their cryptocurrency offerings.

The regulator said Monday that the settlement, which still needs to be approved by a judge, will see Terraform pay $4,473,828,306 ($3,586,875,883 in disgorgement, $466,952,423 in prejudgment interest, plus a $420 million civil penalty).

Kwon, who didn’t attend the trial earlier this year, agreed to pay $204,320,196 ($110 million in disgorgement, $14,320,196 in prejudgment interest, and an $80 million civil penalty). Kwon agreed to transfer “at least” $204 million to Terraform’s bankruptcy handlers for distribution to the rank-and-file holders of LUNA/UST left high and dry by the company’s collapse.

The proposed settlement also prohibits Terraform/Kwon from ever involving themselves in anything remotely resembling securities transactions. The SEC claims the deal will “put Terraform out of business for good” while providing “meaningful and speedy recovery for investor victims.”

Finally, the SEC claims the judgement sends the “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.” A noble sentiment, but this is crypto, a clown car in which there will always be room for one more.

The SEC filed its fraud complaint against Terraform/Kwon in February 2023, nearly a year after Terra’s ‘crypto’ ecosystem collapsed in a heap of its own making, signaling the start of the ‘crypto contagion’ that felled numerous other entities.

In April, a jury in Manhattan found Terraform and Kwon liable on civil fraud charges, including lying about the stability of its LUNA token and UST algorithmic’stablecoin, each of which was (theoretically) supposed to ensure the other’s stability. This theory ultimately proved to be so much handwavy BS, resulting in what the SEC called “one of the largest securities frauds in U.S. history.” At least $40 billion in ‘market value’ was wiped out in the process.

Attorneys representing Terraform/Kwon had tried to claim that the securities laws didn’t apply to their tokens, and thus, the SEC had no right to target the company. But late last year, Judge Rakoff issued a ruling that granted the SEC summary judgment on its claim that Terraform/Kwon had indeed sold unregistered securities to the public, leading to this spring’s trial and this month’s settlement.

The settlement comes as Terraform is bankrupt and in the midst of liquidating its remaining assets. It’s anyone’s guess how much Terra/Luna’s former customers will actually see of the settlement’s nearly $4.5 billion but, given Terraform’s bankruptcy filing, the final figure is likely to be a small fraction of that sum.

The settlement makes plain that the agreed-upon billions “will be treated as an allowed general secured claim of the SEC against Terraform” and that the regulator will collect only “after harmed investors and other general unsecured creditors recover in full.”

In April, a Delaware bankruptcy court filing indicated that Terraform retained just over $430 million in total property, both real-world and digital. The SEC’s original complaint claimed that the defendants “transferred over 10,000 [BTC tokens] from Terraform and Luna Foundation Guard crypto asset platform accounts to an un-hosted wallet, or ‘cold’ wallet.”

The complaint added that the defendants “continue to transfer” some of the BTC “from this wallet to a financial institution based in Switzerland” and convert it into cash. Over $100 million in fiat had been withdrawn from that Swiss bank at the time of that February 2023 complaint.

Meanwhile, Kwon is currently in Montenegro, where he and a fellow suspect were detained in March 2023 for attempting to travel with forged Costa Rican passports. Ever since, American authorities have been trying to extradite Kwon to the U.S. to face criminal charges related to his Reign of Terra(r).

The U.S. extradition efforts have been complicated by similar efforts by South Korea, the land of Kwon’s birth, which wants to prosecute Kwon for the pain he inflicted on local ‘investors’ swindled by the Terraform scam.

Following four months in a Montenegro prison, local authorities released Kwon in April. But he’s prohibited from leaving the country until the extradition slap-fight is finished and either the U.S. or South Korea whisks him away