The agency also seeks conduct-based and “compliance with the law” injunctions.
The U.S. Securities and Exchange Commission (SEC) wants to fine Terraform Labs and its former CEO Do Kwon nearly $5.3 billion for violating U.S. securities laws and fraud charges.
The agency detailed its requested penalty in a legal filing on April 19. The SEC is primarily seeking $4.2 billion in ill-gotten gains plus $545.7 million in prejudgment interest.
The purpose of the ill-gotten gains claim is to force Terraform Labs and Kwon to return the unjust benefits they received from the following channels between June 2021 and May 2022: first, sales of tokens to institutional investors; second, sales through the Luna Foundation Guard contract signed with Genesis Asia Pacific; and third, sales on cryptocurrency exchanges.
The regulator is also seeking civil penalties, including a $420 million fine against Terraform Labs and a $100 million fine against Kwon.
The SEC said that while each civil penalty represented only a small fraction of the defendants’ ill-gotten gains, it served as both a punishment and a deterrent.
Additional restrictions
The SEC also requested non-monetary remedies, including a “comply with the law” injunction to prevent violations of the Securities Act of 1933 and the Exchange Act of 1934.
Additionally, the regulator intends to impose a conduct-based injunction preventing the defendants from engaging in the purchase, offer, or sale of crypto-asset securities, including but not limited to Terra-related tokens such as UST, MIR, LUNA, wLUNA, and LUNA 2.0.
It also seeks to prevent defendants from “inducing” others to enter into such transactions.
Additionally, it aims to prevent Terraform Labs from dispensing with its monetary remedies through a bankruptcy filing. The company filed for Chapter 11 bankruptcy protection in January.
The agency also intends to permanently ban Kwon from serving as an officer or director of a public company and force him to provide sworn accounting reports.
Terraform and Kwon’s response
The defendants responded to the anticipated remedies in the relevant filings.
First, Terraform Labs’ legal team noted that the court can only impose remedies based on token sales that have been proven to have occurred within the U.S. They claimed that the majority of the sales actually took place outside the U.S., which has not been adequately addressed in the court proceedings.
Terraform Labs’ legal team also insisted that the SEC had no authority to demand disgorgement of ill-gotten gains due to a lack of monetary damages or “actual loss.”
Kwon and his legal representatives also claimed no monetary damages and denied that there was evidence that Kwon independently obtained illegal gains from Terraform Labs. The relevant filing is as follows:
"Mr Kwon has no illegal profits to disgorge."
Both parties argued that the maximum civil penalty should be less than the amount sought by the SEC. Based on one estimate, Terraform Labs' defense suggested a maximum civil penalty of $3.5 million, while Kwon's defense suggested a civil penalty of less than $1 million.
Both parties agreed that the ban was unnecessary and suggested that further breaches were unlikely based on the current circumstances.
The SEC initially filed charges against Terraform Labs and Do Kwon in February 2023. The trial began in March, and the court found both parties responsible for the fraud in April. #DoKwon #欺诈指控
