Terraform Lawyers Refuse SEC’s $4.7B Demand

LUCKNOW (CoinChapter.com) — Terraform Labs and its co-founder Do Kwon are pushing back against the U.S. Securities and Exchange Commission’s (SEC) proposed multi-billion dollar penalties following an investor fraud ruling last year. Lawyers of Terraform Labs assert the SEC overstepped its jurisdictional authority and lacked evidence to justify harsh financial remedies.

SEC’s Staggering Demand for Record Penalties

On April 5th, a federal jury found Terraform Labs and Kwon liable for defrauding crypto investors after a two-week trial. Then the regulator sought sweeping punitive measures against Terraform, including a monetary penalty that could exceed $4 billion.

Specifically, the SEC is pursuing $4.7 billion in disgorgement, interest, and civil penalties from Terraform and its key executives. If imposed, it would represent the largest-ever penalty levied by the SEC against a cryptocurrency firm.

In court filings, the SEC said that authorities will not tolerate such “blatant” fraud related to unregistered crypto assets. The regulator accused Terraform of amassing over $4 billion in “ill-gotten gains” through the unregistered sales of its LUNA token and TerraUSD (UST) stablecoin.

UST’s destabilization in May 2022 set off a catastrophic market contagion that wiped out around $40 billion in investor funds, contributing to the downfall of Terraform’s high-flying crypto ecosystem.

Terraform’s Defense — A Case of Overreaching Jurisdiction

However, in a defiant May 1st filing, lawyers representing Terraform Labs pushed back against the SEC’s multi-billion dollar disgorgement claims. The defense team argued that the vast majority of Terraform’s token sales occurred outside the United States, which is beyond the SEC’s jurisdiction in the civil case.

TFL’s offers and sales of tokens occurred almost entirely outside the U.S. […] and the SEC has submitted no evidence that Defendants’ limited activities in the U.S. directly caused any losses, much less the billions the SEC seeks in disgorgement

As per the May 1 filing.

Terraform warned that endorsing the SEC’s penalty calculations would effectively grant the regulator unlimited global jurisdiction over cryptocurrencies. In a separate filing, lawyers for Do Kwon made similar arguments contesting whether his conduct had a “foreseeable substantial effect” on U.S. markets that would justify SEC sanctions.

Mr. Kwon’s role in the conduct that forms the basis of the SEC’s requested judgment was performed entirely abroad, in Korea and Singapore

stated Kwon’s legal team.

Contrasting Penalty Proposals Before the Court

The fiery opposition follows Terraform’s previous claim on April 26th that $1 million in civil penalties would be a “far more appropriate” punishment compared to the SEC’s multi-billion dollar proposal.

Both sides are scheduled to present arguments on the contested remedies before Judge Jed Rakoff on May 22nd. However, Kwon’s participation remains uncertain due to his ongoing extradition proceedings in Montenegro related to separate criminal charges linked to Terraform’s collapse.

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