Terraform Labs Offers $1 Million Penalty in SEC Case

Terraform Labs offers a $1 million penalty to settle SEC charges, significantly lower than the SEC’s requested amount.

The firm’s attorneys filed a motion in opposition to the United States Securities and Exchange Commission’s (SEC) demand for $5.3 billion in disgorgement and civil penalties against Terraform Labs and its co-founder Do Kwon. 

Terraform’s legal team proposed in a filing dated April 26 in the U.S. District Court for the Southern District of New York that a court impose a civil penalty of no more than $1 million after a jury’s verdict of liability for fraud on both the platform and Kwon.

Terraform contended that the court should refrain from granting injunctive relief or disgorgement, as doing so would necessitate obtaining the funds directly from the Luna Foundation Guard (LFG), considered a “non-party” in the civil case. 

“For the SEC to pursue disgorgement from LFG, LFG had to be named as a defendant or relief defendant; however, this did not occur. The filing stated, “This statute prohibits an order against TFL [Terraform Labs] to disgorge LFG funds because TFL did not receive them.”

“Those funds are the property of LFG, not TFL, and LFG conducted the token sales from which they originated.”

Terraform asserted that civil penalties of $1 million would be “substantially more suitable” than the SEC’s multibillion-dollar proposal. Kwon opposed the commission’s motion in a separate filing but argued that the proposed remedy of disclosing complete information about his assets and accounts would violate his Fifth Amendment right against self-incrimination.

A jury deemed Terraform and Kwon liable for investor fraud on April 5, following a two-week trial with the SEC. At the time, a Terraform representative addressed the press that the organization was “vigilantly evaluating its alternatives and subsequent actions.” As of publication, Judge Jed Rakoff had not decided on the proposed remedies. 

Kwon could not attend the trial or verdict because travel restrictions prohibited him from leaving Montenegro. In March 2023, the co-founder of Terraform was apprehended within the nation on suspicion of using forged travel documents.

Local authorities are now evaluating conflicting extradition requests from South Korea and the United States.