From Collapse to Courtroom: The Legal Battle of Terraform Labs and the Multibillion-Dollar SEC Showdown

Lawyers representing Terraform Labs indicated that the SEC should effectively seek the penalty from the Luna Foundation Guard (LFG), which currently is a non-entity in this case.

The US Securities and Exchange Commission (SEC) is said to be proposing a penalty of $5.3 billion following a guilty verdict on fraud by co-founder Do Kwon. But attorneys representing Terraform Labs are of the view that a $1 million fine is more in order. Interestingly, they are seeking a reduction of 99% from the penalty proposed by the US SEC.

Last week, the US SEC said that Terraform and Do Kwon should pay a total of $4.7 billion in disgorgement charges and prejudgement interest.

The courts also are required to pay out $520 million in civil penalties. However, according to their court filing, the lawyers of Terraform insisted this amount should be substantially less. The filing noted: "To pursue disgorgement from Luna Foundation Guard (LFG), the SEC was required to name LFG as a defendant or relief defendant, a claim it does not [make]. .. This statute bars an order against TFL [Terraform Labs] to disgorge LFG funds because TFL did not receive them.".

Those are LFG's funds, not TFL's, and the token sales from which they arose were conducted by LFG. "In sum, the Court should deny any injunctive relief, deny disgorgement, and, at most, impose a $1 million civil penalty against TFL," the attorneys said.

Terraform and Do Kwon Case

Terraform and Ripple find themselves at odds with the US Securities and Exchange Commission (SEC) in legal battles related to violations raised against them. The problems facing the algorithmic stablecoin Terra USD (UST) charge Terraform and co-founder Kwon with the SEC in February 2023. A jury convicted Terraform and Kwon of fraudulently defrauding investors on April 5 after a two-week trial before the SEC. A spokesman for Terraform said that the company plans its next move by critically analyzing its options, even as it moves forward despite the verdict.

Kwon, who was noticeably absent during the trial and the verdict, based on travel limitations that couldn't allow him to leave Montenegro. Kwon, a co-founder of Terraform, had been arrested in Montenegro in March 2023 because he was suspected of using false travel documents. Montenegrin authorities were considering requests from both the US and South Korea for his extradition. Terraform Labs, with a $40 billion collapse back in 2022, left the market in such a hopeless downturn that it submerged several other crypto firms like BlockFi, Celcius, FTX, etc. This year, the platform actually was filing in Chapter 11 of bankruptcy protection.