Terraform Labs has reached an agreement with the United States Securities and Exchange Commission (SEC) to pay 4,474 million dollars (about 4,140 million euros) to resolve a lawsuit over the company’s collapse in 2022. The agreement is It comes after a jury in April found Terraform and its co-founder Do Kwon liable for fraud in a civil case. Kwon still faces a criminal case for the same case, which caused losses of $40 billion to investors, mainly in the stablecoin TerraUSD, and shook the world of crypto assets, involved in other scandals such as the fall of FTX or the conviction of the founder of Binance.
Terraform will pay approximately $3.587 million in restitution, plus $467 million in interest and a fine of $420 million, according to a document filed by the SEC in court. For his part, Kwon will pay $204.3 million, including $110 million in restitution, $14 million in interest and an $80 million fine. Kwon must also transfer at least $204.3 million to the firm’s bankruptcy estate for distribution among investors. The agreement prohibits the co-founder of Terraform from having activities in the world of cryptocurrencies again and from serving as an executive or director of a listed company.
A jury found Kwon and Terraform liable for knowingly and recklessly orchestrating one of the largest frauds in U.S. history. The supervisor points out that the agreement reached, for which he requests the judge’s approval, addresses the magnitude of this fraud by imposing important corrective, punitive and dissuasive measures, including these multimillion-dollar amounts. Settlement Provides for Significant and Quick Recovery for Victim Investors Who Collectively Lost Billions of Dollars in Terraform’s Bankruptcy
“If approved, the proposed sentence will send an unequivocal deterrent message not only to those who engage in blatant misconduct, but also to all those who seek to evade the requirements of the federal securities laws by creating new standards of behavior for cryptoassets that fall under the scope of the federal securities laws,” the SEC indicates in its writing.
Before the deal was reached, the SEC had asked the judge to impose a fine of $5.3 billion, while Terraform claimed it did not have to pay because most of its stablecoins were sold abroad. Finally, he has accepted the agreement that must be ratified by the judge.
A gigantic fraud
The gigantic fraud began when Terraform minted its own tokens of cryptoassets, including Luna and TerraUSD. The defendants sold those crypto assets as securities, promising investors huge profits. The defendants did not register any of these offerings or placements with the SEC, which believes that no exemption from registration existed. To make their crypto assets appear more successful and deceive investors, the defendants engaged in two massive and long-running fraudulent schemes involving several of the cryptocurrencies.
Terraform copied transaction data onto the Terra blockchain to make it appear that a popular Korean payment app called Chai was using the Terra blockchain to process payments, even though those transactions were actually processed through traditional payment methods. The defendants then made dozens of false and misleading statements to investors promoting this alleged real-world use of Terra. “Investors bought in, believing that the defendants had achieved, as one investor said at trial, the ‘holy grail’ of blockchain technology by demonstrating a real use for cryptoassets,” the SEC maintains.
Additionally, the company and its management misled investors about the stability of TerraUST, which they called the lynchpin of the Terra ecosystem, a cryptocurrency supposedly pegged to the dollar. When UST decoupled and fell below its reference price of one dollar in May 2021, the defendants secretly arranged for a high-frequency trading firm called Jump Trading, LLC to step in to support the price of UST.
The defendants then inundated the public with false and misleading statements, suggesting that the UST price had auto-corrected due to Terraform’s algorithm. “These lies and deceptions induced investors to invest tens of billions of dollars in Luna and UST. In May 2022, UST was decoupled from the US dollar again, and this time its value plummeted to almost $0, and the price of Luna (previously trading at a high of $119) also plummeted to almost $0. In total, more than $40 billion in value was lost,” says the supervisor.
Many institutional investors suffered losses of millions of dollars and many retail investors lost their life savings. The defendants, on the other hand, withheld hundreds of millions of dollars from the Terra ecosystem that they still control, including in accounts nominally held by a Terraform alter ego entity that the defendants created and control called Luna Foundation Guard, according to the watchdog.
Kwon, who owns 92% of Terraform, was arrested in Montenegro in 2023 and convicted there for attempting to travel using a false passport. Since then, the disgraced cryptocurrency magnate has been caught in a bureaucratic tug-of-war in Montenegro as authorities fight over whether he should be extradited to the United States or South Korea.
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