In a highly anticipated case brought by the U.S. Securities and Exchange Commission (SEC), the United States Southern District Court of New York has issued a final judgment against Terraform Labs and its co-founder Do Kwon.
The judgment found the defendants guilty of multiple violations of securities laws, imposing harsh penalties and restrictions on their future activities. The penalties include a total fine of approximately $4.5 billion.
According to court documents dated June 12th, the judgment amount includes a $3.6 billion penalty, $467 million in pre-judgment interest, and a $420 million civil penalty.
Kwon is jointly responsible for the aforementioned $1.1 billion penalty and $14.3 million estimated interest.
Additionally, Kwon must transfer various assets to Terraform’s bankruptcy estate, including ownership rights of PYTH tokens and other assets. These assets will be used to pay the fines and distributed to affected investors through a liquidation trust.
The order allows Terraform Labs to treat the amounts owed as unsecured claims in its bankruptcy case, meaning that the SEC will receive these funds according to the distribution priority once Terraform Labs’ bankruptcy protection plan takes effect.
The SEC has the authority to enforce the court judgment using all authorized collection procedures, including the ability to exercise civil contempt court powers if Kwon fails to comply with the turnover order within 30 days of the judgment.
Kwon must also pay $204.3 million in disgorgement relief, separate from his payment obligations to Terraform Labs, which includes the $1.1 billion penalty, $14.3 million pre-judgment interest, and an additional $80 million civil penalty.
The order indicates that Terraform Labs and Kwon violated anti-fraud provisions of Section 10(b) of the Exchange Act and Section 17(a) of the Securities Act.
Furthermore, it permanently prohibits Terraform Labs and Kwon from trading unregistered securities, trading Crypto asset securities, or inducing others to trade Crypto asset securities, among other related restrictions.
These restrictions allow Terraform to perform certain transactions related to its bankruptcy case.
With court approval, the company can dispose of Crypto assets in its bankruptcy estate, and must destroy wallet keys and burn tokens as required.
Terraform Labs and Kwon are prohibited from engaging in any trading activities on their platform, and are not allowed to permit third parties to withdraw, unlock, or close positions on their platform.
The order also permanently bars Kwon from serving as an executive or director of any issuer with registered securities or reporting obligations.
The SEC filed a lawsuit against Terraform Labs and Kwon in February 2023, accusing the company of defrauding Crypto asset investors, including through the now-defunct Terra USD (UST) stablecoin. In April of this year, the court found the defendants liable for fraud.
