US Court Approves Terraform’s $4.5 Billion Settlement in SEC Fraud Case

Jimmy Aki
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On June 13, a U.S. District Court judge approved a settlement involving the Securities and Exchange Commission (SEC), Terraform Labs, and its former CEO, Do Kwon. Under the terms of this settlement, Terraform Labs and Kwon will collectively pay $4.5 billion in penalty.

Insights into Terraform Labs and Kwon Settlement

New York District Court Judge Jed Rakoff approved the US SEC settlement deal between Terraform Labs and Kwon.

The firm will pay nearly $3.6 billion in disgorgement, a $420 million civil penalty, and approximately $467 million in prejudgment interest, while Kwon will personally pay $110 million in disgorgement, $14.3 million in prejudgment interest, and an $80 million civil penalty.

This settlement also includes a permanent ban on Terraform Labs and Kwon from buying and selling all “crypto asset securities,” including tokens from the Terra ecosystem.

It could be recalled that this decision comes after Terraform Labs, responsible for the $40 billion collapse of TerraUSD digital tokens in 2022, agreed to pay $4.47 billion in its settlement with the SEC on June 12.

In a press release, SEC Chair Gary Gensler expressed that Terraform Labs and Kwon settlement should serve as a lesson to the broader crypto industry.

He stated,

“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,” said SEC Chair Gary Gensler. “Terraform and Do Kwon’s fraudulent activities caused devastating losses for investors, sometimes wiping out entire life savings. Their fraud serves as a reminder that when firms fail to comply with the law, investors get hurt. Terraform and Kwon fought our efforts to investigate – taking a fight over investigative subpoenas all the way to the Supreme Court. Thankfully, with this settlement, the victims of their massive fraud will now get some justice.”

As part of the SEC’s proposed agreement, Terraform Labs is required to secure approval for a liquidation plan in its separate Chapter 11 bankruptcy case in Delaware, ensuring an efficient process for repaying investors.

However there’s a growing concern on Terraform’s repayment structure. The firm filed for bankruptcy in January 2024, which means that much of the settlement amount is unlikely to be paid directly, as it will be treated as an unsecured claim in the ongoing Chapter 11 process.

During the bankruptcy proceedings, all of Terraform’s assets will need to be liquidated, with the proceeds used to settle obligations to creditors and investors – the actual recovery for investors will thus be determined by how much is realized from the liquidation of Terraform’s assets.

SEC vs Terraform Legal Battle: Is This the End?

Terraform’s crypto ecosystem collapsed in May 2022 after its algorithmic stablecoin TerraUSD (UST), now known as TerraClassicUSD (USTC), lost its peg to the US dollar. This depeg triggered a downtrend zone for the network’s Terra Classic (LUNC) token, which was designed to help stabilize the price of the stablecoin.

The depegged stablecoin lost $45 billion in value from the Terra blockchain within days, sparking a wider panic in the crypto market that led to significant drops in the value of many tokens.

The SEC sued Terraform and its CEO Do Kwon, in February 2023, charging them with securities law violations and fraud.

While Kwon has been released, he faces a pending decision from the Montenegro court’s regarding extradition requests from the United States and his native South Korea, where he faces criminal charges for alleged crypto fraud.

About Jimmy Aki PRO INVESTOR

Based in the UK, Jimmy is an economic researcher with outstanding hands-on and heads-on experience in Macroeconomic finance analysis, forecasting and planning. He has honed his skills having worked cross-continental as a finance analyst, which gives him inter-cultural experience. He currently has a strong passion for regulation and macroeconomic trends as it allows him peek under the global bonnet to see how the world works.