SEC Settles with Terraform Labs for $4.5 Billion

Terraform Labs and its former CEO, Do Kwon, have consented to a substantial settlement of approximately $4.5 billion, as revealed in recent court filings. This agreement comes after they were held liable for civil fraud in connection to the $40 billion debacle of UST and LUNA in 2022.

Last month, a Manhattan jury concluded that Kwon and Terraform Labs had deceived investors about the Terra blockchain’s success and stability before its dramatic collapse. This verdict has led to the hefty settlement which includes the return of $4.5 billion in ill-gotten gains (plus interest) and a $420 million civil penalty. Moreover, the settlement bars them from engaging in any future crypto asset securities transactions.

Currently, Kwon is embroiled in extradition proceedings in Montenegro, resisting relocation to the U.S. or South Korea, where he faces additional charges. According to the settlement, Kwon will pay $204 million out of his own pocket, a figure that represents “nearly all the relief” sought by the SEC against him for his alleged misconduct. The SEC highlighted that this payment serves as a “deterrent message.”

Under the terms of the agreement, these funds will be transferred from Kwon to the bankruptcy estate of Terraform Labs, pending approval by Judge Jed Rakoff of the U.S. District Court Southern District of New York.

The collapse of UST, an algorithmic stablecoin designed to maintain parity with the dollar through trading incentives rather than asset backing, triggered a chain reaction of failures within the crypto sector, including the downfall of the crypto exchange FTX.

Kwon’s arrest in Montenegro for using a falsified passport complicates his legal situation. While he has already served a four-month sentence in Montenegro, the final decision regarding his extradition remains pending. Meanwhile, the U.S. Department of Justice has charged him with fraud, and he faces accusations of financial crimes in South Korea, including fraud, bribery, and manipulation of transaction volumes, alongside violations of capital markets laws.

As the legal battles continue, the repercussions of this settlement and Kwon’s alleged actions are expected to resonate throughout the cryptocurrency industry, emphasizing the need for regulatory and operational transparency.