SEC Settles with Terraform Labs for $4.5B After TerraUSD Collapse

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Key Takeaways

  • Terraform Labs and its former CEO, Do Kwon, have agreed to a $4.47 billion civil settlement in the SEC fraud case.
  • The settlement follows a jury finding Terraform Labs liable for the 2022 collapse of TerraUSD and Luna tokens that led to a loss of $40 billion.
  • Terraform Labs and Do Kwon are banned from trading crypto assets as part of the settlement.

Terraform Labs has agreed to a $4.47 billion settlement in its case with the US Securities and Exchange Commission (SEC).

It marks a major development in the case against Terraform Labs for its efforts in the $40 billion collapse of the TerraUSD token in 2022.

Terraform Labs Settlement Fee

According to documents filed in Manhattan federal court, Terraform Labs agreed to pay $4.47 billion in its settlement plea with the SEC.

Terraform Labs and its co-founder, Do Kwon, have agreed to a landmark settlement totaling $4.487 billion. The settlement comprises:

  • $3.6 billion in disgorgement fines,
  • $420 million civil penalty,
  • $467 million in prejudgment interest.

This resolution follows a jury verdict delivered after a two-week trial. The jury held Terraform and Kwon liable for the catastrophic collapse of the TerraUSD ecosystem.

Additionally, Do Kwon must pay an $80 million civil fine and transfer $204.3 million to the company’s bankruptcy estate to repay investors. Furthermore, Kwon is barred from serving as an officer or director of any public company, which is intended to prevent any future misconduct in similar roles.

As part of the SEC’s proposed agreement, Terraform Labs must obtain approval for a liquidation plan in its separate Chapter 11 bankruptcy case in Delaware to ensure that repaying investors is carried out efficiently.

Excerpt of US SEC vs Terraform Settlement File

The SEC stated in its court filing,

“Entry of this judgment would ensure the maximal return of funds to harmed investors and put Terraform out of business for good. Thus, this proposed judgment is fair, reasonable, and in the public interest.”

The settlement requires approval from US District Judge Jed Rakoff, who oversaw the trial that concluded on April 5, 2024. Given Terraform’s bankruptcy filing in January 2024, much of the settlement amount is unlikely to be paid directly. Instead, it will be treated as an unsecured claim in the ongoing Chapter 11 liquidation process.

This means that the actual recovery for investors will depend on the outcomes of the bankruptcy proceedings, where Terraform’s assets will be liquidated to satisfy its obligations to creditors and investors.

SEC vs Terraform: New Paradigm in Crypto Space?

Between April 2018 and May 2022, Singapore-based Terraform Labs and its co-founder, Do Kwon, raised billions of dollars from investors by selling various digital securities. According to the SEC’s lawsuit, these securities were not properly registered with regulators.

Among these assets was TerraUSD, a stablecoin created by Kwon and his associates. The crash of TerraUSD in 2022, along with its associated token Luna, caused the crypto market to experience a steep bearish trend and recorded huge losses for investors.

On Feb. 16, 2023, the US SEC accused Terraform Labs and Kwon of deceiving investors about the stability of TerraUSD. This led to billions of losses for investors and created a contagion that took out crypto funds 3AC, BlockFi, and Voyager.

Experts believe the settlement between the US SEC and Terraform Labs will set a significant precedent in the cryptocurrency industry and influence future enforcement actions to promote greater transparency and investor protection in the crypto space.