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  • J Huang and S Pettigrove

Terraform settles for USD$4.5bn over Luna implosion

Terraform Labs and its former CEO Do Kwon have agreed to pay USD $4.47bn to settle civil charges brought by the US Securities and Exchange Commission (SEC). Terraform was the developer behind the $40bn meltdown of the TerraUSD (UST) "stablecoin" in 2022, setting off several subsequent collapses and a prolonged "crypto winter".

According to court documents filed on 12 June 2024, the settlement has been approved by District Court Judge Jed Rakoff of the Southern District of New York. The steep penalty is slightly lower than the SEC’s first settlement offer of $5.3 billion in fines, but much higher than a virtual slap on the wrist. Kwon must pay at least USD$204,320,196 out of his own pocket for distribution to harmed investors.

Despite the legal settlement, the battle between the US and South Korea for Kwon's extradition continues, with the Montenegro Supreme Court considering conflicting requests from Kwon’s home country and the US on criminal charges including fraud and market manipulation. Remarkably, Kwon remains on bail in Montenegro despite being convicted on charges of using a false passport to attempt to flee the European country for Costa Rica.

The agreement comes after a jury handed down a verdict in April that the collapsed stablecoin operator and its former CEO were liable for securities fraud by misleading investors, which led to billions of dollars in losses.  Central to SEC's civil case was that Kwon and Terraform Labs had deceived investors and consumers about the nature of the algorithm that pegged UST to the US dollar. The SEC alleged that Do Kwon implied to the public that the algorithm underpinning the peg operated independently of human interference.

Some commentators have argued that the collapse of Terra/Luna and TUSD was attributable to a "complex phenomenon that happened across multiple chains and assets", rather than concentrated market manipulation by a third party. However, the jury determined that the claim that the algorithm was immune from market manipulation (i.e. human interference) was fraudulent on the part of Kwon and Terraform Labs.

This case affirms what court after court has said: The economic realities of a product — not the labels, the spin, or the hype — determine whether it is a security under the securities laws.

Before the settlement was approved, lawyers for the SEC also filed a letter saying that:

the proposed judgment will send an unmistakable deterrent message to not only those who engage in brazen misconduct, but also to all those who seek to evade the requirements of the federal securities laws by crafting new standards of behavior for crypto assets that fall under the purview of the federal securities laws.

Terraform Labs is currently in Chapter 11 bankruptcy protection and, according to current CEO Chris Amani's trial testimony, has approximately $150 million in assets on hand. It is currently unclear how the company will pay the hefty fines. While the settlement is another milestone in the cleanup from the heady COVID crypto boom, Kwon continues to await final judgment for his role in the Luna fiasco.

Written by J Huang and S Pettigrove


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