SEC Targets Record $5.3 Billion Penalty in Landmark Case Against Kwon and Terraform

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The SEC is seeking a record $5.3 billion fine against Terraform Labs and Do Kwon for their role in the collapse of the Terra/LUNA stablecoin, signaling a significant crackdown on cryptocurrency misconduct.

Heavy Penalty for Do Kwon, Terraform 

The U.S. Securities and Exchange Commission (SEC) is moving to impose its most substantial fine to date on a cryptocurrency project, targeting an eye-watering $5.3 billion against Do Kwon and Terraform Labs. The two have been deemed responsible for the collapse of the Terra/LUNA stablecoin, a project designed to be pegged to the US dollar. This collapse triggered widespread industry repercussions, wiping out nearly $40 billion in market value.

Both Entities Found Liable For Fraud

Kwon and Terraform were found liable for civil fraud earlier this month after a two-week trial in New York. The charges were related to concealing risks within their trading scheme and the unsustainable 20% yields offered by Terraform's Anchor lending platform. Despite Kwon's absence from the trial due to arrest in Montenegro, where he is still awaiting extradition, the court ruled against him and Terraform.

SEC's Claims 

The SEC alleges that Kwon and Terraform made over $4 billion through unregistered token sales, including LUNA and UST. In its filing to the Southern District Court of New York on April 19, the SEC emphasized the need for a strong message against such misconduct. They seek to permanently ban Kwon from serving as an officer or director and demand a "sworn accounting" of his assets.

The SEC said such measures were necessary to deter future violations, saying,  

“Defendants have not shown remorse for their conduct, nor can there be any doubt that they are in a position where additional violations are not only possible but likely are already occurring.”

Proposed Fine

The proposed fine includes a $4.2 billion disgorgement penalty, $545 million in prejudgment interest, and $420 million and $100 million in civil penalties for Terraform and Kwon, respectively.

The size of the proposed fine is unprecedented, signaling the SEC's serious stance. It follows a similar hefty penalty of $1.8 billion proposed for Ripple and would surpass the $4.3 billion settlement by Binance Holdings Ltd. for anti-money laundering and US sanctions violations charges.

Legal Challenges

Lawyers representing Kwon and Terraform have challenged the SEC's claims, arguing that the token sales occurred outside the US and didn’t breach federal securities law. Despite initially questioning US jurisdiction, they are now advocating to limit the fine to $3.5 million (Terraform's lawyers) and $1 million (Kwon’s defense).

The substantial size of the fine reflects the SEC's uncompromising stance, especially considering its recent $1.8 billion penalty proposed for Ripple. This proposed fine would exceed the $4.3 billion settlement paid by Binance Holdings Ltd. to resolve charges with the US Department of Justice in November 2023, marking one of the largest corporate agreements in US history.

Disclaimer: This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice. 

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