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Terraform Labs Can’t Pay $4.5bn SEC Settlement With Only $75 Million Worth of Assets

Last Updated June 13, 2024 11:06 AM
Teuta Franjkovic
Last Updated June 13, 2024 11:06 AM

Key Takeaways

  •  Terraform labs wiped out billions in market value and almost collapsed the crypto industry in 2022.
  • The company agreed to pay $4.47bn even though it is not clear where money will come from.
  • The company reported that its assets and liabilities ranged between $100 million and $500 million.
Terraform Labs, responsible for the TerraUSD stablecoin, has agreed to pay  $4.47 billion in fines to settle a civil lawsuit with the Securities and Exchange Commission (SEC), as announced on Wednesday.
Additionally, Do Kwon, the company’s founder and a figure in ongoing criminal proceedings by the Justice Department, will contribute $204 million towards the settlement with the SEC.

Terraform Labs, Do Kwon Must Pay $4.5 Bn Despite Bankruptcy, Frozen Assets Questions Remain

This settlement is pending the approval of a federal judge and comes after a jury in April found both Terraform Labs and Kwon guilty of fraud. Currently, Kwon also faces criminal charges in the United States and is awaiting extradition proceedings in Montenegro.

However, when in January, the company filed for bankruptcy, it reported that its assets and liabilities ranged between $100 million and $500 million. Since this is a settlement worth $4.5 billion, it is still unclear where the money will come from.

In May, a court in South Korea approved a prosecutor’s request to freeze assets belonging to Do Kwon, valued at approximately KRW 233.3 billion (USD 176 million). This enforcement action encompasses a range of Kwon’s assets, including his private residence in Seoul, various real estate properties, imported vehicles, securities with Mirae Asset Securities, deposits at Woori Bank, and cryptocurrencies across several exchanges.

Kim Hee-kyung, a spokesperson for the Seoul prosecutor’s office, confirmed  these details and noted that the frozen assets are believed to equate to the illegal profits Kwon accrued, intended for use as compensation pending the final court decision. Under the current legal constraints, Kwon is barred from transferring or selling these assets.

The prosecutor’s office has not provided additional comments regarding the specifics of Kwon’s assets in South Korea nor about efforts to coordinate with foreign authorities to freeze his assets located abroad.

SEC Jurisdiction Challenged in New Filings

Last month Terraform Labs’ legal team submitted a filing contesting the scope and jurisdiction of the SEC in their case. The filing, dated Wednesday, May 1, asserts that the majority of Terraform’s token sales occurred outside the United States, questioning the SEC’s pursuit of billions in disgorgement based on limited activities within the U.S.

The legal team argues that the SEC has not adequately linked any actions by Terraform or its founder, Do Kwon, to significant financial losses in the United States.

In a separate but related filing, Do Kwon’s attorneys contend that his activities, primarily conducted in Korea and Singapore, did not have a significant and foreseeable impact on the U.S. market. They challenge the foundation of the SEC’s charges, maintaining that the regulatory body has failed to prove that Kwon’s role at Terraform resulted in substantial effects within the United States. These arguments are part of ongoing efforts by Kwon and his legal team to dispute the jurisdiction and reach of the SEC in this international case.

Terraform Labs: “We Disagree”

In April, the SEC moved forward with a motion seeking a final judgment against Terraform Labs and its founder Do Kwon, following a jury’s verdict on April 5 that found them guilty on all charges.

The SEC’s motion advocates for the court to impose a permanent injunction on Terraform and Kwon, aiming to enforce stricter regulatory compliance and potentially significant penalties. This legal step is a direct follow-up to the jury’s decision, which underscores the severity of the charges against Terraform and its founder.

 

After the jury’s verdict, Terraform Labs publicly expressed disappointment and raised questions about the fairness and accuracy of the jury’s decision, indicating skepticism towards the outcome.

Freed, But Not Free: Lawyer Challenges Detention After Prison Release

After being released from prison in March, Do Kwon, a South Korean citizen, was not granted freedom but was instead taken into custody by immigration officials. Following a five-hour interrogation session, he was transferred to a detention center for foreigners.

Kwon’s lawyer, Goran Rodić,  contested the legality of this action and plans to challenge it in the Administrative Court. Rodić argues that Kwon should have been allowed to remain free while awaiting the ruling on his extradition, as per a previous court decision that purportedly entitled him to defend himself during the extradition process.

According to Rodić, the measures taken by immigration officials, including heightened security and what he claims was an unlawful interrogation at the police headquarters, were not justified.

Despite Bankruptcy, Terraform Pledges to Honor Financial Obligations

In January this year Terraform Labs filed for Chapter 11 bankruptcy  in the US, as per recent court documents.

The Singapore-based company’s filing in the Delaware bankruptcy court shows its assets and liabilities are between $100 million and $500 million.

Despite the bankruptcy proceedings, Terraform Labs has committed to fulfilling its financial obligations to employees and vendors without the need for extra financing. The firm also intends to maintain its expansion in the Web3 sector.

According to the official statement :

“The filing will allow TFL to execute on its business plan while navigating ongoing legal proceedings, including representative litigation pending in Singapore and U.S. litigation involving the Securities and Exchange Commission (SEC).”

Do Kwon, the figure behind the TerraUSD stablecoin and Luna token collapse in 2022, which resulted in a loss of at least $40 billion and exacerbated a $2 trillion downturn in the crypto market, is currently in custody in Montenegro.

His arrest was for traveling with a fake passport, and he faces potential extradition to the US by mid-March on major fraud charges. Court documents reveal Kwon as the 92% shareholder of Terraform Labs, with the remaining share owned by South Korean entrepreneur Daniel Shin. The company is incorporated in Singapore.

“The Terra community and ecosystem have shown unprecedented resilience in the face of adversity, and this action is necessary to allow us to continue working toward our collective goals while resolving the legal challenges that remain outstanding,” Terraform Labs Chief Executive Officer Chris Amani stated. 

Partial Victory – Judge Rules Unregistered Securities Sold

In addition to fraud charges, Do Kwon and Terraform Labs face a lawsuit from the Securities and Exchange Commission (SEC). Last month, US District Judge Jed S. Rakoff sided with the SEC, ruling that Terraform Labs sold unregistered securities.
However, he dismissed claims that the company engaged in transactions involving unregistered security-based swaps. Judge Rakoff determined that the SEC’s fraud allegations against Terraform should be decided by a jury trial.

The trial in the United States concerning Terraform Labs and its co-founder Do Kwon, initially scheduled for January 29, has been delayed. The SEC, which is bringing the case in a Manhattan federal court, requested this postponement , expressing the desire for Kwon to be present at the trial.
The SEC has opposed the idea  of conducting separate trials for Terraform Labs and its co-founder Do Kwon, arguing that the cases against both entities are fundamentally the same. The regulatory body contends that separate trials would be redundant, burdening whistleblowers and retail investors with the need to testify twice. This stance was clarified as part of the ongoing legal proceedings involving Kwon and Terraform Labs.

Ripple’s Alderoty Highlights Impact on Crypto Industry

Stuart Alderoty, the chief legal officer of Ripple, commented  on the Terraform Labs case ruling by Judge Jed Rakoff, which favored the Securities and Exchange Commission (SEC). Although Alderoty did not express a clear stance on the Terraform Labs case, he emphasized three critical aspects of the court’s decision and the widespread implications for the cryptocurrency industry.

Highlighting these key elements, Alderoty underlined  the importance of a factual basis in legal decisions, particularly in cases involving complex financial products like digital assets. He noted the significance of applying the Howey Test, a legal framework for determining if a transaction is an investment contract and thus a security. This application marked Terraform Labs’ digital assets, including UST, as unregistered securities, representing a significant victory for the SEC.

Furthermore, Alderoty observed  the absence of any criticism or reference to a similar ongoing case involving Ripple in Judge Rakoff’s decision, a notable omission considering the similarities between the two cases related to allegations of unregistered securities in the form of digital assets.

His critique also extended to the SEC’s strategy of regulating cryptocurrencies through litigation, which he characterized as an approach more driven by political power than sound policy. This perspective highlights a growing concern within the cryptocurrency sector about the SEC’s regulation methods.

Alderoty’s comments come at a time when the cryptocurrency industry is facing regulatory uncertainties and prolonged legal battles, suggesting increasing resistance within the industry to the SEC’s legal threats. This resilience is becoming evident despite the SEC’s continued attempts to assert its authority over the rapidly changing digital asset landscape.

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