U.S. Judge Signs Off on $4.5B Terraform-Do Kwon Settlement With SEC

• A U.S. judge has agreed to a settlement between the SEC, Do Kwon and Terraform Labs.

• The settlement involves a $4.5 billion penalty and a ban on trading "crypto asset securities."

A U.S. District Court judge has agreed to a settlement between the Securities and Exchange Commission (SEC), Terraform Labs and its former CEO, Do Kwon, which would have them pay billions in penalties as well as virtually ban them from the crypto industry, according to the court filings.

The settlement approved by District Court Judge Jed Rakoff of the Southern District of New York (SDNY) involves Terraform Labs and Kwon paying a combined $4.5 billion in disgorgement and civil penalties while being permanently banned from buying and selling all "crypto asset securities," including Terra ecosystem tokens.

The settlement comes just two months after a New York jury found Terraform Labs and Kwon civilly liable for fraud stemming from the $40 billion collapse of the Terra ecosystem in May 2022. Terra's implosion led to the collapse of crypto hedge fund Three Arrows Capital which, in turn, took out other crypto companies including Genesis Global Capital and, indirectly, FTX.

“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 in a Thursday press release. “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.”

The SEC first suggested a $5.3 billion settlement in the case, which lawyers for Terraform Labs countered by telling the judge that the company should be fined no more than $1 million in civil penalties. On June 6, lawyers for both Kwon and Terraform Labs agreed to the SEC's second settlement offer of $4.5 billion.

Kwon, still in custody in Montenegro awaiting a decision on his extradition, did not appear at the trial where the settlement was reached.

Terraform Labs is currently in Chapter 11 bankruptcy protection and, according to current CEO Chris Amani's trial testimony, has approximately $150 million in assets on hand. It is currently unclear how the company will pay the hefty fines.

The settlement is binding and cannot be appealed.

Update (June 13, 2024, 22:15 UTC): Adds SEC statement.