Lawyers representing the United States Securities and Exchange Commission (SEC) have responded to a memorandum submitted by Terraform Labs regarding proposed remedies for judgment in a civil case. The SEC’s filing, submitted on May 6 in the U.S. District Court for the Southern District of New York, challenges Terraform’s arguments for reduced disgorgement in the civil case, for which the firm was found liable by a jury. According to the SEC, Terraform and co-founder Do Kwon never made the argument in court that the commission was applying federal laws beyond U.S. borders in relation to the offer and sale of tokens. The SEC filing states, “Defendants’ arguments lack merit as they rely on a misapplication of the law and misstatement of the relevant facts.”
Even if the court were to accept the legal basis of Terraform’s argument, the SEC provides examples of activities in the U.S. that could be used to enforce securities laws. The argument made by Terraform, however, fails to mention the role played by U.S. company Jump in restoring TerraUSD (UST) to its dollar peg, which the SEC refers to as a “secret role.” Terraform’s former communications head, based in California, allegedly posted misleading tweets at Kwon’s direction, falsely attributing UST’s recovery to its algorithm. Kwon himself promoted UST in person at a conference in New York in September 2021 and spoke to media outlets with a U.S. audience.
The SEC plans to seek $3.6 billion in disgorgement from Terraform and Kwon, as well as $1.7 billion in “ill-gotten gains from Defendants’ net sales of UST.” In response, Terraform has proposed a $1 million civil penalty and no disgorgement.
Following a two-week trial, a jury found Terraform and Kwon guilty of fraud in April. All parties involved in the civil lawsuit are scheduled to return to court on May 22, when Judge Jed Rakoff will consider the proposed remedies.
Kwon was unable to attend the trial in person due to legal issues in Montenegro. In 2023, he was arrested and sentenced to four months in prison for using falsified travel documents. Kwon remains in Montenegro as extradition requests from the U.S. and South Korea are being considered by the courts.