The US Securities and Exchange Commission (SEC) wants nearly $5.3 billion in fines from Terraform Labs and its former CEO, Do Kwon for violations of the US securities laws and charges of fraud.
The agency detailed its requested fines in an April 19 legal filing. The SEC is primarily seeking $4.2 billion in disgorgement plus $545.7 million in prejudgment interest.
The disgorgement aims to have Terraform Labs and Kwon surrender “unjust enrichment” earned from token sales to institutional investors, sales via a Luna Foundation Guard contract with Genesis Asia Pacific, and sales on crypto exchanges between June 2021 and May 2022.
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 each civil penalty is a small fraction of the defendants’ ill-gotten gains but acts as punishment and deterrence.
Additional restrictions
The SEC also requested nonmonetary remedies, including “obey-the-law” injunctions preventing violations of the Securities Act of 1933 and Exchange Act of 1934.
Additionally, the watchdog intends to impose conduct-based injunctions 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 aims to prevent the defendants from “inducing” others into such transactions.
Furthermore, it aims to prevent Terraform Labs from discharging its monetary remedies through bankruptcy. The firm filed for Chapter 11 bankruptcy protection in January.
The agency also intends to permanently bar Kwon from serving as an officer or director of a publicly held company and compel him to provide a sworn accounting.
Terraform and Kwon respond
The defendants responded to the expected remedies in related filings.
First, Terraform Labs’ legal team said that the court must impose remedies based only on token sales proven to have occurred in the US. It asserted that most conduct and sales happened outside the US and that court proceedings have not yet addressed this matter.
Terraform’s legal team also asserted that the SEC is not entitled to disgorgement because of a lack of pecuniary harm or “out-of-pocket loss.”
Kwon and his legal representation also argued a lack of pecuniary harm and denied there is evidence that Kwon received ill-gotten gains separately from Terraform Labs. The relevant filing reads:
“There are no illegal profits for Mr. Kwon to disgorge.”
Both parties asserted that maximum civil penalties should be lower than the SEC’s requested amounts. In one estimate, Terraform Labs’ defense suggested a maximum civil penalty of $3.5 million, while Kwon’s defense suggested a civil penalty below $1 million.
Both parties also argued that injunctions are unwarranted and suggested that further offenses are unlikely based on 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 liable for fraud in April.
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