The United States Securities and Exchange Commission (SEC) has filed for substantial financial penalties against Terraform Labs and its co-founder, Do Kwon, following a jury's verdict that found them liable for defrauding investors. The SEC's proposal, filed on April 19 in the U.S. District Court of New York, seeks approximately $4.7 billion in disgorgement and prejudgment interest, alongside $520 million in civil penalties. This request includes $520 million from Terraform and $100 million from Kwon.

Disagreements on the Magnitude of Penalties

The disparity between the penalties proposed by the SEC and those suggested by the defendants is stark. Terraform Labs has proposed a maximum civil penalty of $3.5 million, while Do Kwon has advocated for a significantly lower penalty of $800,000. These figures contrast sharply with the SEC's much larger demand, highlighting the ongoing debate over the appropriate consequences for their actions.

In addition to financial penalties, the SEC is pushing for stringent measures to prevent future misconduct. These include barring Do Kwon from serving as an officer or director of any company that issues securities and enforcing a conduct-based injunction on Terraform to ensure there is no repeat of the fraudulent activities. The SEC also seeks full disclosure of Kwon’s banking accounts and assets.

Background of Fraud Allegations

The legal actions stem from accusations that Terraform Labs and Do Kwon misled investors with false statements related to the marketing and sale of digital currencies such as TerraUSD (UST), Luna, and wLUNA. A jury on April 5 confirmed the SEC’s allegations, ruling that the company and its co-founder engaged in deceptive practices designed to mislead investors.

The SEC has emphasized the defendants' lack of remorse and the potential for future violations as critical factors in their demand for substantial penalties. The commission argues that a stern penalty is necessary to deter similar behavior in the future, especially as it pertains to setting precedents within the rapidly evolving cryptocurrency market.

Pending Judicial Review

The proposed financial remedies and additional sanctions are now awaiting judicial approval. In response to the jury's decision, a spokesperson for Terraform stated that the company is "carefully weighing its options and next steps." This case marks a significant development in the SEC's oversight of cryptocurrency practices, potentially setting a precedent for how similar cases are handled in the future.

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