US SEC Pursues $5.3B Penalty Against Terraform Labs and Do Kwon

Jimmy Aki
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The United States Securities and Exchange Commission (SEC) filed a motion on April 19, requesting a $5.3 billion payment in disgorgement and civil penalties against Terraform Labs and its co-founder Do Kwon following a verdict in its civil case.

US SEC Petitions “Securities Issuer” Ban on Do Kwon

In its petition filed with the Southern District of New York Federal Court, the SEC requested civil penalties for $520 million. This includes $420 million from Terraform Labs and $100 million from Do Kwon, the founder of Terraform Labs. The commission also requested about $4.7 billion in disgorgement and interest, alleging “unjust enrichment.”

The parties, which are the SEC, Terraform Labs, and Kwon, had submitted summaries regarding potential resolutions in the civil case, but there is a notable difference in their views on the appropriate penalties.

Terraform Labs has proposed a maximum civil penalty of $3.5 million, a figure opposed by Do Kwon, who argued for a lower penalty of $800,000. In addition to the financial penalties, the SEC has recommended ineligibility for Do Kwon to serve as “an officer or director” of a security issuer while requesting full disclosure of his banking accounts and assets.

The SEC noted that the defendants showed a lack of remorse and are deserving of additional violations.

“The Court should send an unequivocal message that this sort of brazen misconduct, and Defendants’ misbegotten attempt to excuse their behavior by crafting new rules and standards of behavior for crypto markets in contravention of the federal securities laws will not be tolerated,” said the SEC filing.

This SEC’s latest petition stems from an April 5 federal jury verdict in New York against Terraform Labs and Do Kwon for defrauding investors over the offer and sale of the platform’s assets, TerraUSD (UST), Luna, and wLUNA which amounted to billions. But the value of the assets later fell to zero.

US SEC Seeks “Conduct-Based Injunction” Against Defendants

The SEC is also seeking a “conduct-based injunction” against Terraform Labs to prevent future misconduct.

A conduct-based injunction is a court order that prohibits a party from engaging in certain conduct or activities in the future based on past behavior. This injunction would require Terraform Labs to implement measures to ensure compliance with securities laws and prevent any repetition of the alleged violations.

By seeking a conduct-based injunction, the SEC aims to not only address the alleged violations that have already occurred but also prevent future misconduct by Terraform Labs. It is a proactive measure intended to protect investors and maintain the integrity of the securities markets.

Meanwhile, the US SEC included two declarations as part of its motion for final judgment to provide further detail on how they arrived at the disgorgement fine.

These declarations both entailed the tracking of Terraform Labs’ token sales of MIR, UST, and LUNA, which uncovered a combined “blockchain and orderbook evidence that confirms that Terraform affiliates received a sum of at least $4.148 billion in crypto assets.”

The SEC case against Terraform Labs and Do Kwon continues to unfold, even as Kwon faces legal proceedings in Montenegro.

In March 2023, Kwon was arrested for attempting to leave the country with fake travel documents. While he has been released since then, it remains uncertain whether he will be extradited to the US or his home country, South Korea.

Notably, the requested penalty, in this case, exceeds the $4.3 billion settlement agreed by Binance in a plea deal with the US Department of Justice (DOJ) that also led to ChanPeng Zhao stepping down as the CEO of the exchange while its subsidiary Binance.US suffering consequences from the lawsuit.

The outcome of the SEC’s actions against Terraform Labs and Kwon and how this process might impact the cryptocurrency industry is a topic of considerable interest. The key factor that could alter the course of events is whether Kwon will be extradited to the United States. If extradition does not occur and the penalty is imposed, it could trigger controversies.

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.