Do Kwon, Terraform Labs Should Get $5.3B Fine, SEC Tells Court

The SEC, which is the securities regulatory body in the United States, has requested a New York court to levy penalties amounting to $5.3 billion against Terraform Labs and its co-founder Do Kwon. These penalties are in response to their involvement in the collapse of the Terra ecosystem in 2022, which resulted in approximately $40 billion in losses.

A Manhattan jury recently determined that Terraform Labs and Kwon have committed civil fraud by deceiving investors regarding the reliability of their supposed “algorithmic” stablecoin, Terra USD (UST), and the practical applications of the Terra blockchain.

The SEC’s request for final judgment, submitted two weeks after the trial ended, asks Terraform Labs and Kwon to return $4.74 billion in disgorgement and pre-judgment interest, along with paying a total of $520 million in civil penalties. Specifically, Terraform Labs would pay $420 million, while Kwon is responsible for $100 million.

In a related legal document, the Securities and Exchange Commission argued before the court that Kwon and Terraform Labs had obtained approximately $4 billion (and possibly even more) through their unlawful activities.

The SEC noted that the penalty was a “moderate estimate” of the illicit profits earned by Terraform and Kwon.

No remorse

The SEC intends to pursue injunctions against Kwon and Terraform Labs in addition to imposing large fines. These injunctions would prevent them from engaging in any further securities violations, buying or selling any crypto asset securities, and would also ban Kwon from holding executive positions at publicly traded companies reporting to the SEC.

The SEC stated that these actions were essential to prevent repeating offenses, as “The defendants have failed to express regret for their actions, and it is clear that they remain in a situation where further violations may not only be probable but could already be ongoing.”

During the nine-day trial, the SEC seemed to strongly critique Chris Amani’s testimony as the current CEO of Terraform Labs. He stated that the company was still in the process of developing its products and continued to offer tokens for sale.

The SEC labeled Amani’s testimony as an “honest admission of anticipated repeat offenses.” Furthermore, the SEC stated that Terraform’s new CEO testified with audacity, trying to elicit pity from the court. He mentioned that Terraform had given out a revised version of their token – LUNA 2.0 – to those affected, yet they continued to use investors’ funds and distributed more unregistered securities.

Terraform weighs in

In a document submitted to the court on the same day as the SEC’s, Terraform argued that the SEC should not be granted injunctive relief or required to return any funds (disgorgement), but rather be permitted to impose a reasonable civil penalty for each proven violation of U.S. laws committed by Terraform.

At the court hearing, Amani gave evidence stating that the now-bankrupt company had around $150 million worth of assets left.

A representative for Terraform Labs did not respond to CoinDesk’s request for comment.

Do Kwon

Kwon’s legal team submitted a document arguing against granting an injunction against him. They pointed out that he is jobless at present and faces ongoing criminal accusations, making it unnecessary. Moreover, they stated that Kwon does not possess any ill-gotten gains to return.

Kwon is currently in Montenegrian custody after being apprehended there last year for trying to pass off fake Costa Rican travel papers during his journey towards Dubai.

The Montenegrian authorities are presently considering opposing extradition demands from the United States and South Korea. The US and South Korea intend to prosecute Kwon for alleged crimes related to the Terra collapse.