Terraform & Do Kwon to pay SEC $4.5b after fraud verdict

Terraform Labs and its co-founder, Do Kwon, have agreed to a massive $4.5 billion payout to the Securities and Exchange Commission (SEC) after a jury found them guilty of a long-running crypto fraud. This verdict follows years of deceitful practices that led to significant losses for investors when their scheme fell apart.

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According to the SEC, a nine-day jury trial in April revealed the depth of Terraform and Kwon’s lies. They misled investors about using the Terraform blockchain to settle transactions and falsely promoted the stability of their stablecoin, UST.

SEC says economic realities determine crypto’s security status

In May 2022, when UST lost its peg to the U.S. dollar, the value of UST and other Terraform tokens dropped to almost zero. This collapse wiped out $40 billion in market value, causing devastating losses for many, including retail investors who had invested their life savings based on Terraform’s false promises. SEC Chair Gary Gensler 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.

He emphasized that Terraform and Kwon’s fraudulent activities led to catastrophic losses for investors, sometimes wiping out entire life savings. Gensler also pointed out that Terraform and Kwon resisted the SEC’s investigative efforts, even taking the fight over subpoenas to the Supreme Court. He expressed relief that the settlement would provide some justice for the victims of this massive fraud.

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Gurbir S. 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. As the jury found, that was a lie, as was their claim of creating an ‘algorithmic stablecoin.’”

Kwon and Terraform pay billions in settlement

The SEC charged Terraform and Kwon in the U.S. District Court for the Southern District of New York on February 16 last year with securities fraud and for offering and selling securities in unregistered transactions. The Court found Terraform and Kwon liable on December 28 for these unregistered transactions.

Following this, Terraform filed for Chapter 11 bankruptcy on January 21 in the U.S. Bankruptcy Court for the District of Delaware. Finally, on April 5, a jury unanimously found Terraform and Kwon liable for securities fraud after two hours of deliberation.

Terraform agreed to pay $3,586,875,883 in disgorgement, $466,952,423 in prejudgment interest, and a $420,000,000 civil penalty as part of the settlement. Additionally, Terraform will stop selling its crypto asset securities, wind down its operations, replace two directors, and distribute its remaining assets to investors and creditors through a court-approved liquidation plan.

Do Kwon agreed to pay $110,000,000 in disgorgement and $14,320,196 in prejudgment interest on a joint and several basis with Terraform. He also agreed to an $80,000,000 civil penalty. Both Kwon and Terraform consented to a final judgment that permanently enjoins them from violating securities laws’ registration and fraud provisions.

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Cryptopolitan reporting by Jai Hamid