The Securities and Exchange Commission (SEC) has announced a landmark settlement involving Terraform Labs PTE, Ltd. and its founder Do Kwon, following a unanimous jury verdict that found them liable for orchestrating a massive fraud involving crypto asset securities. This verdict concludes one of the largest securities fraud cases in U.S. history, with Terraform and Kwon agreeing to pay over $4.5 billion to compensate victims.

The Fraud Unveiled

The case, which culminated in a nine-day jury trial in April, exposed the depth of deception by Terraform and Kwon. They misled investors about the legitimacy and stability of their crypto asset, UST, and the usage of the Terraform blockchain for settling transactions. When UST de-pegged from the U.S. dollar in May 2022, the resulting crash obliterated $40 billion in market value, causing devastating losses to numerous investors, many of whom had invested their life savings.

SEC’s Statement

SEC Chair Gary Gensler commented on the case, emphasizing the importance of the economic realities of a product in determining its status as a security under the law. Gensler stated, “Terraform and Do Kwon’s fraudulent activities caused devastating losses for investors, in some cases wiping out entire life savings. Their fraud serves as a reminder that, when firms fail to comply with the law, investors get hurt.”

Gurbir S. Grewal, Director of the SEC’s Division of Enforcement, added, “Do Kwon and Terra falsely claimed to have achieved the Holy Grail of crypto: a non-illicit use case. The jury found that this was a lie, as was their claim of creating an ‘algorithmic stablecoin.’ Their fraud wiped out tens of billions of dollars in market value and created a trail of victims.”

The Legal Battle and Verdict

The SEC originally charged Terraform and Kwon with securities fraud and unregistered securities transactions on February 16, 2023, in the U.S. District Court for the Southern District of New York. Following a District Court ruling on December 28, 2023, and a unanimous jury verdict on April 5, 2024, Terraform and Kwon were held liable for securities fraud.

Financial Penalties and Corporate Reforms

As part of the settlement:

• Terraform will pay $3,586,875,883 in disgorgement, $466,952,423 in prejudgment interest, and a $420,000,000 civil penalty. They have also agreed to wind down their operations, replace two directors, and distribute remaining assets to investor victims and creditors through a court-approved liquidation plan in their ongoing bankruptcy case.
• Do Kwon will pay $110,000,000 in disgorgement, $14,320,196 in prejudgment interest (jointly with Terraform), and an $80,000,000 civil penalty.

Both Terraform and Kwon have consented to a final judgment that permanently enjoins them from future violations of the relevant securities laws.

Conclusion

This case underscores the SEC’s commitment to holding crypto asset issuers accountable and protecting investors from fraudulent schemes. The successful litigation and substantial settlement demonstrate the SEC's ability to pursue justice for victims, regardless of the vast resources deployed by defendants in the crypto space.

The litigation was managed by an exemplary team of SEC attorneys and investigators, whose diligent efforts ensured that justice was served. The SEC continues to represent investors in Terraform’s bankruptcy case, striving to maximize the recovery for those harmed by this unprecedented fraud.