Terraform Labs to pay $4.5bn in SEC fraud case

Terraform Labs, the company behind the $40bn collapse of TerraUSD digital tokens in 2022, has agreed to pay $4.47bn in a case brought by the US Securities and Exchange Commission, making it the latest major cryptocurrency company to pay a hefty US penalty.

The collapsed stablecoin operator and its chief executive, Do Kwon, were found liable by a New York jury in April in a civil case brought by the SEC, which accused them of arranging a cryptocurrency fraud that led to billions of dollars in losses.

According to documents filed in Manhattan federal court on Wednesday, Terraform has agreed to pay $4.47bn in monetary penalties along with a prohibition on “engaging in crypto asset securities transactions”.

“The entry of this judgment would ensure the maximal return of funds to harmed investors and put Terraform out of business for good,” the SEC said in a letter filed with the court.

As part of the agreement proposed by the SEC to the court, Kwon will pay $204mn. He is also banned from serving as an officer or director of any public company.

“If approved, the proposed judgment will send an unmistakable deterrent message to not only those who engage in brazen misconduct, but also to all those who seek to evade the requirements of the federal securities laws by crafting new standards of behaviour for crypto assets that fall under the purview of the federal securities laws,” the SEC said in its letter.

Under the proposed resolution, Terraform must seek approval for a liquidation plan as part of its separate Chapter 11 bankruptcy case in Delaware. Kwon must also transfer at least $204mn to the company’s bankruptcy estate to repay investors.

The agency declined to comment beyond court documents. Terraform declined to comment. A lawyer representing Kwon did not immediately respond to a request for comment.

Between April 2018 and May 2022, Singapore-based Terraform and Kwon raised billions of dollars from investors by selling a number of interlinked digital securities, many of which were not properly registered with regulators, according to the SEC’s complaint.

Among those assets was TerraUSD, a stablecoin Kwon invented. Its crash in 2022, alongside associated token luna, sent shockwaves through the crypto sector.

Kwon is wanted by the US and South Korean authorities on separate criminal charges, but remains in Montenegro amid a legal fight over his extradition.

Kwon and his business are among the once high-flying crypto companies and executives targeted by US authorities, who say they are protecting investors.

The founder of crypto exchange FTX, Sam Bankman-Fried, was sentenced to 25 years in prison earlier this year after being convicted of fraud by a New York jury. Binance founder Changpeng Zhao was sentenced to four months in jail, and the exchange paid $4.3bn in fines for failing to prevent money laundering and financing to terrorist organisations.