Original author: Lucy, Sky
On June 13, Reuters reported that Terraform Labs agreed to pay $4.47 billion in a case with the SEC. The last time such a large-scale fine was seen was Binance's $4 billion.
“Entering this judgment will ensure the maximum possible return of funds to harmed investors and put Terraform out of business,” the SEC said in court documents. “Accordingly, this proposed judgment is fair, reasonable, and in the public interest.” Terraform and Kwon consented to the judgment. Their lawyers did not immediately respond to requests for comment.
Half-year court battle
Recalling the LUNA collapse two years ago, the $84 million UST sell-off triggered a terrible disaster for Terra. As the second largest public chain ecosystem, nearly $40 billion evaporated in just two days.
Although after UST triggered the death spiral, there were rumors that institutions such as Jump and Alameda reached a behind-the-scenes deal and were ready to invest $2 billion to save the market. Binance also participated in the UST defense battle and forcibly set a trading floor price for the UST order book. However, the UST collapse still occurred in full view of the public, becoming the first large-scale Thai baht + Lehman event in the history of crypto development.
Related reading: $84 million leverages a $40 billion financial empire, the whole story of UST’s collapse
After the collapse of LUNA, the SEC accused the company and its former CEO Kwon Do-hyeong of securities fraud in February 2023, alleging that they had planned a "billion-dollar crypto asset securities fraud" and raised billions of dollars from investors by "offering and selling a series of interrelated crypto asset securities."
Subsequently, the news of the verdict of Terraform Labs and Do Kwon has been affecting the crypto community, and the case was originally scheduled to go to trial in January 2024. On January 12, Do Kwon expressed his desire to appear in court in person and therefore requested that his trial be postponed to mid-March 2024.
$166 million "slush fund"
On January 22, in response to the SEC's securities fraud lawsuit, Terraform Labs filed for Chapter 11 bankruptcy protection, stating in the document that its assets and liabilities ranged from US$100 million to US$500 million, and that it had 100 to 199 creditors.
On February 5, Han Chang-joon, the former chief financial officer of Terraform Labs, was extradited to South Korea. Montenegrin police said that criminal offenses related to financial investment services, investment and capital market fraud "are punishable by life imprisonment in South Korea." But despite this, according to Lee (pseudonym), a former developer of Terraform Labs, who testified in a South Korean court, Do Kwon and Shin Hyun-seung still offered the TerraUSD stablecoin as a potential payment option to investors.
Subsequently, Han Chang-joon was arrested by the Seoul Southern District Prosecutors' Office on February 8 on charges of making 53.6 billion won (about 40 million US dollars) in profits through suspected fraudulent marketing of the Terra stablecoin, and the total illegal gains with other accomplices amounted to 462.9 billion won.
Han was also accused of illegally recording about 100 million user electronic payment information on the Terra blockchain without permission, and manipulating the market price and trading volume of Terra and Luna coins by using "robot" programs. In addition, he was also suspected of presenting the currency issued by Terra as a fixed price, which was actually a way to manipulate the market within a specific price range through a large number of transactions, violating the public offering and sales regulations of the capital market.
In preparation for the trial, Terraform Labs paid law firm Dentons an advance of $166 million at the end of February.
The SEC expressed strong dissatisfaction with this, accusing the huge advance payment of being a "slush fund" that could have been used to repay the company's creditors. Terraform Labs paid $122 million in a senior payment bond to Dentons, and the SEC said that unless the law firm returns the remaining $81 million in the bond account, it should not be allowed to represent Terraform Labs and its fees should be supervised by the bankruptcy court.
Faced with the SEC's opposition, Terraform Labs raised questions and applied to the bankruptcy court for permission to hire a special litigation counsel and requested that $6.3 million in legal fees be allocated to employees and external partners facing litigation. In the end, according to court documents, approximately $3.25 million will be used to pay employees' legal fees. On March 13, the U.S. court allowed Terraform Labs to hire Dentons law firm.
A $4.55 billion fine
Unlike Binance, Terraform Labs' settlement process was not "smooth", and it had been arguing with the SEC for months over the amount of the fine.
Since his arrest, Do Kwon has been detained in a Montenegrin prison and was tried in a Manhattan court on March 25. An SEC lawyer told the jury in Manhattan that Terraform Labs and its founder Do Kwon repeatedly lied about the success of the cryptocurrency platform.
As their case on charges of defrauding investors draws to a close, regulators are seeking civil financial penalties against Do Kwon and Terraform, as well as an order to ban them from the securities industry.
On April 6, Terraform Labs and Do Kwon were found guilty by a jury in a civil fraud case in the U.S. federal court in Manhattan. A Terraform spokesperson said the company was disappointed with the verdict and that the SEC had no authority to bring the case.
In a filing on April 19 with the U.S. District Court for the Southern District of New York, the SEC asked Do Kwon and Terraform to pay approximately $4.7 billion in disgorgement and prejudgment interest following the adjudication of the civil case, as well as a total civil penalty of $520 million, with Terraform to pay $420 million and Do Kwon to pay $100 million.
Terraform proposed a maximum civil penalty of $3.5 million, while Do Kwon proposed $800,000.
On May 1, a U.S. federal judge ordered the parties to discuss compensation packages ranging from millions to billions of dollars after a jury found Terraform Labs and its co-founder Do Kwon liable in a fraud case with the U.S. Securities and Exchange Commission (SEC).
In further compensation proposals, the SEC still requested a fine of $5.22 billion, while Terraform's legal team further reduced the amount of compensation, recommending a civil penalty of $1 million without paying forfeiture of proceeds.
On May 30, Terraform Labs and Do Kwon reached a preliminary "in principle" settlement with the SEC over the fraud case. The final total judgment amount reached US$4.55 billion, and Terraform has agreed to pay a civil penalty of US$4.47 billion.
Does Do Kwon still have to go to jail?
There are only a handful of fines of over $4 billion in the cryptocurrency world, and only Binance’s $4 billion can be compared to it.
On November 21 last year, the US regulatory authorities launched another official attack on Binance, with the US Department of Justice issuing a fine of more than $4 billion as part of a proposed settlement of its years-long investigation. At the same time, CZ was also sentenced to 4 months in prison.
Related reading: "The U.S. Department of Justice issued a $4 billion fine, and Binance reached a settlement with regulators"
Not only CZ, but also the founders who once stirred up the crypto world could not escape. If SBF's 25-year imprisonment was deserved, the conviction of the founder of Tornado Cash is still controversial, and even Vitalik donated to him for legal aid.
The Terraform judgment includes $4.05 billion in disgorgement and interest, and a $420 million civil penalty. Much of this money may not be paid because Terraform filed for bankruptcy in January. Instead, it will be considered an unsecured claim in the Chapter 11 bankruptcy case, and Terraform is in the process of liquidating.
While information about Do Kwon’s criminal sentence is still unknown, he faces an $80 million civil fine, a ban on crypto trading, and is required to transfer $204.3 million to Terraform’s bankruptcy assets.
It should also be emphasized that in addition to the SEC's civil lawsuit, Do Kwon is currently facing criminal charges in both South Korea and the United States, and the battle for talent between the two countries remains unresolved.
Do Kwon was originally ruled in February to be extradited to the United States for trial, but in March the appeals court changed the decision to extradite him to South Korea. Later, the Supreme Prosecutor's Office of Montenegro asked the Supreme Court to overturn the ruling and seek to extradite Do Kwon to the United States instead. He is currently still waiting for the extradition decision in Montenegro.
Terraform Labs' bankruptcy filing was intended to enable the company to continue executing its business plan while facing legal proceedings in a securities fraud case filed by the SEC. But today, according to The Block, Terraform Labs plans to sell its projects in the Terra ecosystem, including Pulsar Finance, Station Wallet, and Enterprise DAO. Terraform Labs CEO Chris Amani asked the community to take over as the company plans to dissolve its business.
"TFL has always intended to disband at some point, and that time is now," Chris Amani said, marking the end of Terraform Labs. "We will completely cease operations." BlockBeats will also continue to pay attention to the subsequent development of Terraform Labs and Do Kwon.
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