Terraform Labs, Do Kwon Agree to Pay SEC a Combined $4.5B in Civil Fraud Case

As a researcher with a background in finance and securities law, I view this settlement between Terraform Labs and the SEC as a significant development that underscores the increasing regulatory scrutiny of the crypto industry. The agreement, if approved by the court, would result in a hefty financial penalty for Terraform Labs and its former CEO Do Kwon, sending a strong message to market participants that non-compliance with securities laws will not be tolerated.

As an analyst, I can share that Terraform Labs and its ex-CEO Do Kwon have reached a consent decree with the U.S. Securities and Exchange Commission (SEC). Under this arrangement, they are required to pay approximately $4.5 billion in total – a combination of disgorgement and civil penalties.

The filing of the settlement agreement on Wednesday includes a provision that perpetually prohibits Kwon and Terraform Labs from engaging in transactions involving crypto asset securities, encompassing all tokens within the Terra system.

The SEC’s legal team submitted a letter to Judge Jed Rakoff of the United States District Court for the Southern District of New York, asking him to endorse the proposed settlement agreement in addition to his final ruling in the case.

“If granted, the suggested ruling will deliver a clear warning to both blatant rule-breakers and those attempting to skirt the federal securities laws by inventing fresh norms for crypto assets subject to these regulations,” the legal team stated. The SEC chose not to provide additional remarks.

A spokesperson for Terraform Labs remained silent about the potential agreement and its implications for the company’s future.

In April, a New York court ruled in favor of the SEC’s civil fraud allegations against Kwon and Terraform Labs, which led to the $40 billion crash of the Terra ecosystem in May 2022. Despite being in custody in Montenegro, awaiting extradition proceedings to the U.S. or South Korea for criminal charges related to Terra’s collapse, Kwon was not present at the trial.

As a researcher studying this particular legal matter, I’ve come across court documents that reveal Kwon and Terraform Labs’ current CEO, Chris Amani, reached an agreement on the terms of a settlement on June 6. However, it is important to note that this agreement needs to be approved by the New York judge presiding over the case before it becomes legally binding.

Among the total amount of $4,473,828,306 that Terraform Labs and Kwon are required to pay to the SEC for disgorgement, prejudgment interest, and civil penalties, at least $204,320,196 comes directly from Kwon’s personal funds. The significant penalty is less than the SEC’s initial settlement proposal of a $5.3 billion fine but much more severe than Terraform Labs’ counterproposal to the court in their April memorandum against the SEC’s motion for final judgment, which only included a $1 million civil penalty and no disgorgement or injunctions.

At Terraform’s trial, Amani testified that the company, now under Chapter 11 bankruptcy proceedings, had around $150 million worth of assets left.