Terraform Labs Faces Billions in Damages for Terra Blockchain Fraud

The SEC seeks to impose substantial penalties on Terraform Labs (TFL) and Do Kwon, amounting to $5.3 billion in cumulative damages for fraud. The agency requests disgorgement of ~$4.2 billion, pre-judgment interest of ~$546 million, and civil penalties totaling ~$520 million. If granted, this case could become the most significant crypto enforcement action, surpassing previous settlements involving Binance and the Department of Justice.

Terraform Labs Faces Hefty Damages for Terra Blockchain Fraud

The United States Securities and Exchange Commission (SEC) has filed a request for injunctive relief and damages totaling over $5.3 billion against Terraform Labs (TFL) and its founder, Do Kwon, for orchestrating a fraudulent scheme involving the now-defunct Terra blockchain.

SEC's Request for Relief

In a filing dated April 19, the SEC sought a court order demanding that TFL and Kwon pay approximately $4.2 billion in disgorgement, representing the profits they allegedly obtained through their unlawful activities. The agency also requested pre-judgment interest of approximately $546 million.

Additionally, the SEC recommended civil penalties of $420 million against Terraform and $100 million against Kwon. The order proposed by the SEC prohibits TFL from discharging any monetary remedies imposed through bankruptcy and bars Kwon from serving as a director of any securities issuer in the future.

Landmark Crypto Enforcement Action

If granted by the court, the proposed penalties would constitute the largest crypto-related enforcement action in history. This would surpass the $4.3 billion settlement reached between the Department of Justice and Binance, the world's largest cryptocurrency exchange, in February 2023.

Unlike Binance's case, which centered on anti-money laundering controls, Terraform's case involves allegations of securities law violations and investor fraud. The SEC claims TFL misled investors about the stability and revenue-generating potential of its blockchain's associated tokens, LUNA and UST.

SEC's Enforcement Director Statement

"Through these deceptions, the defendants caused devastating losses for investors and wiped out tens of billions of market value nearly overnight," stated Gurbir S. Grewal, Director of the SEC's Division of Enforcement, following the court's verdict against TFL and Kwon on April 5. He emphasized the consequences of non-compliance with registration and regulatory requirements, despite the promise of cryptocurrencies.

Kwon's Counterarguments

In response to the SEC's request, Kwon has opposed any form of injunctive relief against him. His legal team argues that there is no evidence to suggest that Kwon will re-engage in the alleged conduct. Additionally, they contend that disgorgement fines are unwarranted since Kwon did not personally profit from the scheme beyond TFL's earnings.

Regarding the civil penalties, Kwon's lawyers have proposed a modest fine of approximately $800,000. They argue that any further penalties should be based on criteria provided by the court and in TFL's remedies brief.