The Securities and Exchange Commission (SEC) announced late last night that Terraform Labs and its CEO Do Kwon have agreed to pay over $4.5 billion following a unanimous jury verdict holding them liable for orchestrating a multi-year fraud involving crypto asset securities. The scheme resulted in massive investor losses when it collapsed in May 2022.
The nine-day trial in April revealed the depth of the defendants’ deception, including false claims about the use of the Terraform blockchain for transaction settlement and the stability of their crypto asset security, TerraUSD (UST). Evidence presented at trial showed that UST’s de-pegging from the U.S. dollar caused the price of UST and Terraform’s other tokens to plummet, wiping out $40 billion in market value nearly overnight and causing severe financial harm to numerous retail investors.
SEC Chair Gary Gensler emphasized the significance of this case, stating, “This case affirms what court after court has said: The economic realities of a product—not the labels, the spin, or the hype—determine whether it is a security under the securities laws. Terraform and Do Kwon’s fraudulent activities caused devastating losses for investors, in some cases wiping out entire life savings. Their fraud serves as a reminder that, when firms fail to comply with the law, investors get hurt.”
Gensler further highlighted the importance of the settlement, saying that Terraform and Kwon fought the agency’s efforts to investigate – “taking a fight over investigative subpoenas all the way to the Supreme Court.”
Gurbir Grewal, Director of the SEC’s Division of Enforcement, added, “Do Kwon and Terra orchestrated one of the largest securities frauds in U.S. history by, among other things, falsely claiming that they had achieved the Holy Grail of crypto: a non-illicit use case.”
The SEC initially charged Terraform and Kwon in the U.S. District Court for the Southern District of New York on February 16, 2023, with securities fraud and for offering and selling securities in unregistered transactions. The District Court found Terraform and Kwon liable on December 28, 2023, for these charges. Terraform subsequently filed for Chapter 11 bankruptcy in the U.S. Bankruptcy Court for the District of Delaware on January 21, 2024.
On April 5, 2024, a jury found Terraform and Kwon liable for securities fraud after less than two hours of deliberation. As part of the settlement, Terraform agreed to pay $3,586,875,883 in disgorgement, $466,952,423 in prejudgment interest, and a $420,000,000 civil penalty. They also consented to cease selling their crypto asset securities, wind down operations, replace two directors, and distribute remaining assets to investor victims and creditors through a court-approved liquidation plan.
Kwon will pay $110,000,000 in disgorgement, $14,320,196 in prejudgment interest on a joint and several basis with Terraform, and an $80,000,000 civil penalty. Both defendants are permanently enjoined from violating the registration and fraud provisions they breached.
Information for this story was found via the sources mentioned. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.
