SEC Seeks Over $5 Billion in Penalties from Terraform Labs in Landmark Crypto Fraud Case

The U.S. Securities and Exchange Commission (SEC) is pursuing significant penalties exceeding $5 billion against Terraform Labs and its co-founder, Do Kwon, in a landmark crypto fraud case. Following a jury verdict that found both parties guilty of defrauding investors through their crypto offerings, the SEC is seeking hefty financial penalties to enforce compliance with federal securities laws.

After a nine-day trial concluded on April 5, 2024, a New York jury held Terraform Labs PTE Ltd. and Do Kwon accountable for defrauding investors in crypto asset securities. The Court determined that Terraform Labs and Kwon unlawfully offered and sold crypto asset securities, violating the registration provisions of the Securities Act of 1933.

According to court documents filed on April 19, the SEC is demanding approximately $4.7 billion in disgorgement and prejudgment interest from Terraform Labs, in addition to $520 million in civil penalties. This includes $520 million anticipated from Terraform and an extra $100 million from Do Kwon.

The disparity between the SEC’s demands and the defendants’ proposed penalties is striking. Terraform Labs has suggested a maximum civil penalty of just $3.5 million, while Do Kwon has proposed a mere $800,000 in penalties. Alongside financial penalties, the SEC seeks to prohibit Kwon from serving as an officer or director of any security issuer and mandates full disclosure of his banking accounts and assets to prevent future misconduct.

This case exemplifies the SEC’s firm stance on crypto regulation and underscores the importance of strict compliance with federal securities laws. The SEC’s filing reflects a lack of contrition from the defendants and highlights the significant risk of recurring violations.

The proposed remedies, including a ‘conduct-based injunction’ against Terraform to deter future misconduct, are awaiting judicial approval.

This case follows other notable settlements in the crypto sector, such as a $4.3 billion agreement with Binance and its former CEO, Changpeng Zhao. These developments underscore the SEC’s dedication to enforcing compliance and transparency within the rapidly expanding digital asset market