Terraform Labs and its CEO, Do Kwon, have reached a preliminary agreement to settle a fraud case with the U.S. Securities and Exchange Commission (SEC), as stated in court documents. During a telephone conference on May 29, both parties’ legal representatives revealed the agreement in principle. It is anticipated that the settlement terms will be finalized and submitted for court approval by June 12, 2024.
In February, Terraform and Kwon were found responsible for defrauding investors in their civil case with the SEC. On May 29, they were scheduled to discuss potential remedies for the case.
The SEC’s case against Terraform and Kwon centered on the deceptive promotion and sale of crypto tokens, specifically the algorithmic stablecoin Terra USD (UST) and its associated tokens. The SEC accused Terraform and Kwon of offering crypto assets without proper registration and misleading investors about their stability and investment potential.
The collapse of Terraform in May 2022 triggered the recent crypto winter, which resulted in a significant market downturn and impacted numerous crypto firms and investors.
As a result, Kwon and Terraform are facing a substantial financial penalty, with the SEC seeking approximately $5.3 billion in disgorgement, prejudgment interest, and civil penalties. However, Terraform Labs has proposed a much lower penalty of $1 million, disputing the need for disgorgement, particularly from affiliated entities like the Luna Foundation Guard, which were not directly mentioned in the SEC’s case.
In addition, the SEC has suggested prohibiting Kwon from holding any positions as an officer or director in securities-issuing entities. The regulatory body has also demanded that Kwon fully disclose the details of his financial accounts and assets. On the other hand, Kwon argued in a separate filing that revealing his asset and account information would violate his Fifth Amendment rights against self-incrimination.
Kwon was arrested in March 2023 for falsifying travel documents while attempting to leave Montenegro, where he may also face charges. He was later released on bail, and the U.S. is currently seeking his extradition.
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