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Terraform Labs, Do Kwon to Pay SEC $4.47 Billion in Fraud Settlement

Highlights:

  • Terraform Labs and Do Kwon agree to pay $4.47 billion to the SEC in a fraud settlement.
  • The settlement permanently bans Terraform Labs and Kwon from trading crypto asset securities.
  • Kwon must transfer $204.3 million to the Terraform bankruptcy estate for investor distribution.

Terraform Labs and its former CEO Do Kwon have agreed to a settlement with the U.S. Securities and Exchange Commission (SEC), agreeing to pay a total of $4.47 billion in disgorgement and civil penalties. The settlement will also include a permanent ban on Kwon and Terraform Labs from buying and selling crypto asset securities.

Agreement Details

The settlement was filed on Wednesday and, if approved, will also permanently prohibit Kwon and Terraform Labs from engaging in transactions involving crypto asset securities, including all tokens within the Terra ecosystem. The SEC has urged the New York judge, U.S. District Court Judge Jed Rakoff of the Southern District of New York (SDNY), to approve the agreement.

Terraform Labs

The lawyers for the SEC stated, “If approved, the proposed judgment will send an unmistakable deterrent message to those who engage in brazen misconduct and to all those who seek to evade the requirements of the federal securities laws.” The SEC declined to provide further comments.

A representative for Terraform Labs also declined to comment on the proposed settlement or its implications for the company’s future.

Fraud Charges and Penalties

In April, a New York jury found Kwon and Terraform Labs liable on civil fraud charges related to the $40 billion collapse of the Terra ecosystem in May 2022. Kwon, currently in custody in Montenegro awaiting extradition to either the U.S. or South Korea, was not present for the trial.

Court documents reveal that Kwon and Terraform Labs’ current CEO, Chris Amani, agreed to the settlement terms on June 6. The agreement must still be approved by the overseeing judge before becoming binding.

Of the $4.47 billion settlement, Kwon is required to pay at least $204.3 million out of his own funds. This amount is significantly higher than Terraform Labs’ suggested $1 million civil penalty but lower than the SEC’s initial $5.3 billion fine proposal.

During the trial, Amani testified that Terraform Labs, currently under Chapter 11 bankruptcy protection, has about $150 million in remaining assets.

Impact on Terraform Labs

The SEC’s proposed resolution requires Terraform Labs to wind down its operations and seek approval for a Chapter 11 liquidation plan. This plan would entail the replacement of company directors, including the current CEO, Chris Amani. Subsequently, a trustee or estate representative would be appointed to manage the remaining assets to benefit creditors and investors.

“The entry of this judgment would ensure the maximal return of funds to harmed investors and put Terraform out of business for good,” stated the SEC in a letter to Judge Rakoff.

David Kornblau, a lawyer for Terraform, declined to comment.

Legal Consequences for Kwon

Jurors found Terraform and Kwon committed fraud. Additionally, they made false claims about Chai, a popular Korean payment application that purportedly used Terraform’s blockchain technology for transactions. Investors were also misled about the stability of the UST stablecoin, which Kwon and Terraform claimed was algorithmically pegged to the US dollar. Do Kwon owns 92% of Terraform.

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Disclaimer: Cryptocurrency is a high-risk asset class. This article is provided for informational purposes and does not constitute investment advice. You could lose all of your capital.

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