Terraform and co-founder Do Kwon reach settlement with SEC

Terraform Labs and its co-founder Do Kwon have reached a “settlement in principle” with the U.S. Securities and Exchange Commission (SEC) regarding a fraud case, according to a court filing on Thursday.

The development follows the launch of a civil fraud trial against Kwon and Terraform Labs in New York less than two months ago.

The SEC had sought to impose a $5.3 billion penalty, its largest fine yet on a cryptocurrency project. The settlement was disclosed during a court session on May 29, which was conducted via telephone without transcription or recording. All counsels were present, and the oral argument set for that day was cancelled. The parties are required to submit the necessary settlement documents to Judge Jed S. Rakoff by June 12.

Do Kwon is currently out on bail in Montenegro, awaiting extradition to either the U.S. or South Korea. He faces criminal charges in both countries. Kwon, who co-founded the algorithmic stablecoin Terra and its sister token LUNA, saw the Terra ecosystem collapse in May 2022, triggering widespread turmoil in the cryptocurrency industry.

In a court filing, the U.S. Securities and Exchange Commission (SEC) requested that Kwon and Terraform pay $4.7 billion in disgorgement and interest for their involvement in the Terra-Luna collapse of 2022. Additionally, the SEC is seeking civil penalties of $420 million for Terraform and $100 million for Kwon.

The civil court jury in New York found Kwon and Terraform Labs liable for misleading customers regarding the safety of investing in their algorithmic stablecoin Terra USD (UST) and the utility of its underlying blockchain. Investors reportedly purchased over $2 billion worth of UST from exchanges and other trading venues.

The SEC defended its proposed fines as “conservative” yet “reasonable,” citing the massive profits Kwon obtained from Terraform’s stablecoin despite its eventual failure. However, Terraform Labs is contesting the amount of the civil penalties, arguing for a maximum fine of $3.5 million, while Kwon has offered to pay $800,000.

Terraform Labs has been granted approval by court in March to cover legal expenses with its remaining funds.

Concerns were raised last month over Terraform’s allocation of up to $166 million in retainer payments to its legal team since 2023, a move criticized for diverting essential funds away from creditors. This big outlay represented a risk to the assets available for creditor repayment amidst the ongoing bankruptcy case.

Meanwhile, Dentons agreed to return $48 million to Terraform and accepted additional oversight from the bankruptcy court moving forward.

The SEC has particularly taken issue with Terraform’s decision to hire the law firm Dentons, arguing that such a move is designed to shield funds from potential judgments in the lawsuit related to the collapse of TerraUSD.

Terraform Labs, alongside its founder Do Kwon, is involved in legal proceedings in the United States. They are charged by the SEC in connection with the dramatic downfall of its stablecoin, TerraUSD, and its sister token, LUNA, in May 2022. The implosion of these digital assets erased billions in investor value, leading Terraform Labs to seek Chapter 11 bankruptcy protection in Delaware in January 2024.

Many enforcement authorities and financial regulators, as well as the Interpol, were already on the hunt for Kwon for his alleged involvement in the collapse of terraUSD (UST) stablecoin and the Terra ecosystem.