Terraform Labs, along with its CEO Do Kwon, has reached a preliminary agreement to settle a fraud case with the U.S. Securities and Exchange Commission (SEC), as per court documents.
During a telephone conference held on May 29 before Judge Jed S. Rakoff, the lawyers representing both parties revealed the settlement in principle. The final terms of the settlement are expected to be established and presented to the court for approval by June 12, 2024.
In February, Terraform and Kwon were found responsible for defrauding investors in their civil case with the SEC. On May 29, the parties were scheduled to discuss potential remedies for the case.
The SEC’s case against Terraform and Kwon primarily focused on the deceptive promotion and sale of crypto tokens, particularly the algorithmic stablecoin Terra USD (UST) and its associated tokens. The SEC accused Terraform and Kwon of offering crypto assets without proper registration and misleading investors about their stability and investment potential.
The collapse of Terraform in May 2022 triggered the recent crypto winter, resulting in a significant market downturn and impacting various crypto firms and investors.
Kwon and Terraform are facing a substantial financial penalty, as the SEC is seeking approximately $5.3 billion in disgorgement, prejudgment interest, and civil penalties. However, Terraform Labs has proposed a considerably lower penalty of $1 million, arguing against disgorgement, especially from affiliated entities not directly mentioned in the SEC’s case, such as the Luna Foundation Guard.
Additionally, the SEC has suggested prohibiting Kwon from holding any officer or director roles in securities-issuing entities. The regulator has also demanded that Kwon fully disclose information about his financial accounts and assets. However, in a separate filing, Kwon has claimed that providing these details would violate his Fifth Amendment rights against self-incrimination.
In March 2023, Kwon was arrested for falsifying travel documents while attempting to leave Montenegro, where he may also face charges. He was subsequently released on bail, and the U.S. is seeking his extradition.