The SEC filed charges against Terraform and Kwon in the U.S. District Court for the Southern District of New York on February 16, 2023, alleging securities fraud and the offering and selling of securities in unregistered transactions.
The Securities and Exchange Commission (SEC) announced Thursday, that Terraform Labs PTE, Ltd. and Do Kwon have agreed to pay over $4.5 billion. This follows a unanimous jury verdict finding them guilty of orchestrating a multi-year fraud involving crypto asset securities, which resulted in significant investor losses when the scheme collapsed.
During a nine-day jury trial in April, the extent of the defendants' deception was revealed, showing how they misled victims about the use of the Terraform blockchain for transactions and the stability of their crypto asset security, UST. The SEC presented evidence indicating that in May 2022, when UST de-pegged from the U.S. dollar, the value of UST and other Terraform tokens plummeted to near zero.
This led to a loss of $40 billion in market value almost overnight, causing severe financial harm to numerous investors, including many retail investors who had invested their life savings based on the defendants' false claims.
“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,” said SEC Chair Gary Gensler. “Terraform and Do Kwon’s fraudulent activities caused devastating losses for investors, in some cases wiping out entire life savings. Their fraud serves as a reminder that, when firms fail to comply with the law, investors get hurt. Terraform and Kwon fought our efforts to investigate – taking a fight over investigative subpoenas all the way to the Supreme Court. Thankfully, with this settlement, the victims of their massive fraud will now get some justice.”
“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.’ In the end, all they succeeded in doing was lying to investors, wiping out tens of billions of dollars in market value, and creating a trail of victims,” said Gurbir S. Grewal, Director of the SEC’s Division of Enforcement. “Today’s multi-billion dollar settlement not only holds them accountable and prioritizes the return of hundreds of millions of dollars to harmed investors, but also makes clear that, despite the vast resources that crypto asset defendants deploy against us, the dedicated staff of the Division of Enforcement will not stop until they achieve justice for the victims of these breathtaking frauds.”
The SEC filed charges against Terraform and Kwon in the U.S. District Court for the Southern District of New York on February 16, 2023, alleging securities fraud and the offering and selling of securities in unregistered transactions. Subsequently, on December 28, 2023, the District Court held Terraform and Kwon accountable for selling crypto asset securities in unregistered transactions.
Following this, on January 21, 2024, Terraform submitted a voluntary Chapter 11 petition in the U.S. Bankruptcy Court for the District of Delaware. Finally, on April 5, 2024, a jury unanimously found Terraform and Kwon guilty of securities fraud after less than two hours of deliberation.
As part of the settlement, Terraform has agreed to disgorge $3,586,875,883, pay $466,952,423 in prejudgment interest, and a civil penalty of $420,000,000. Furthermore, Terraform has committed to ceasing the sale of its crypto asset securities, winding down its operations, replacing two directors, and distributing its remaining assets to the victims and creditors through a liquidation plan. This plan is subject to court approval in Terraform's ongoing bankruptcy case.
Kwon, on a joint and several basis with Terraform, has agreed to disgorge $110,000,000, pay $14,320,196 in prejudgment interest, and a civil penalty of $80,000,000.
Additionally, the defendants have consented to a final judgment that permanently prohibits them from violating the registration and fraud provisions they previously violated.
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