Terraform, Do Kwon to reach fraud settlement with SEC

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Terraform Labs and its CEO Do Kwon have agreed in principle to settle a fraud case with the U.S. Securities and Exchange Commission (SEC), according to court filings. 

The lawyers representing both parties disclosed a settlement in principle in a telephone conference held before Judge Jed S. Rakoff on May 29. The settlement terms are expected to be finalized and submitted for court approval by June 12, 2024.

Terraform and Kwon were found liable for defrauding investors in its civil case with the SEC in February. The parties were scheduled to discuss remedies in the case on May 29.

The SEC case against Terraform and Kwon focused on the misleading promotion and sale of crypto tokens, particularly the algorithmic stablecoin Terra USD (UST) and its related 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 Terraforms in May 2022 triggered the latest crypto winter, leading to a sharp downturn across markets and affecting multiple crypto firms and investors.

Kwon and Terraform face a significant financial penalty as the SEC sought approximately $5.3 billion in disgorgement, prejudgment interest, and civil penalties. Meanwhile, Terraform Labs proposed a significantly lower penalty of $1 million, arguing against disgorgement, especially from affiliated entities not directly named in the SEC’s case, like the Luna Foundation Guard.

The SEC went further to propose a prohibition on Kwon’s roles as an officer or director in any securities-issuing entity. The regulator also demanded Kwon fully disclose details about his financial accounts and assets. In a separate filing, Kwon claimed that providing details of his assets and accounts would violate his Fifth Amendment rights against self-incrimination.

Kwon was arrested in March 2023 for falsifying travel documents while trying to leave Montenegro, where he also faces potential charges. He was later released on bail, and the U.S. seeks his extradition.

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