A New York jury found Terraform Labs and its co-founder Do Kwon guilty of fraud. 

Terraform Labs’ lawyers have vehemently denied the allegations, arguing that the majority of token sales occurred outside the United States. 

Terraform Labs and its co-founder Do Kwon have been found guilty of fraud by a New York jury. The verdict follows a two-week trial during which the Securities and Exchange Commission (SEC) presented evidence of alleged wrongdoing by the defendants. The outcome of this case has significant implications for the regulatory space surrounding digital assets, with the SEC seeking a record-breaking penalty against Terraform Labs and Kwon.

Fraud Charges and SEC’s Demands

The jury’s decision on April 5 marked a pivotal moment in the legal battle between Terraform Labs, Do Kwon, and the SEC. The regulatory body accused the defendants of orchestrating unregistered token sales, resulting in over $4 billion in purportedly “ill-gotten gains.” Among the tokens implicated in the case were LUNA and UST, with the latter experiencing a substantial market value loss in 2022.

Terraform Labs’ lawyers have vehemently denied the allegations, arguing that the majority of token sales occurred outside the United States. They contend that the SEC has failed to provide conclusive evidence linking Terraform and Kwon’s activities to the losses cited in the charges. Despite these assertions, the SEC has pressed for a penalty of $5.3 billion, signaling a firm stance against what it perceives as egregious misconduct in the crypto space. 

This move follows the SEC’s pursuit of $4.7 billion in disgorgement and prejudgment fines, alongside $520 million in civil penalties, related to the Terra-Luna cryptocurrency crash in early April. The SEC’s charges stem from the collapse of TerraUSD and Luna, which reportedly erased around $40 billion from the crypto market in spring 2022.

Legal Defense and Counterarguments

In response to the SEC’s demands, Terraform Labs’ legal team submitted filings challenging the basis for the proposed penalty. They argue that “Mr. Kwon’s role in the conduct that forms the basis of the SEC’s requested judgment was performed entirely abroad, in Korea and Singapore”. Moreover, they assert that the SEC has not demonstrated how Kwon’s actions had a significant and foreseeable impact within the United States.

The defense’s contention is bolstered by their assertion that the SEC’s requested penalty far exceeds what they deem justifiable. Terraform Labs’ lawyers have proposed a significantly lower fine of $1 million, highlighting what they perceive as an unreasonable disparity between the alleged wrongdoing and the proposed penalty.

Implications and Regulatory Response

The outcome of this case has far-reaching implications for the cryptocurrency industry, particularly concerning regulatory oversight and investor protection. Gurbir Grewal, the director of the SEC Enforcement Division, welcomed the verdict, stating,

“For all of the crypto’s promises, the lack of registration and compliance have very real consequences for real people.”

He emphasized the need for compliance among crypto entities, citing the substantial losses incurred by investors as a result of Terraform Labs’ actions. While the SEC pursues aggressive fines against crypto entities, including recent penalties imposed on Ripple Labs and Binance, Kwon’s fate remains uncertain amid ongoing extradition negotiations and legal maneuvering. The SEC’s pursuit of a record penalty against Terraform Labs and Do Kwon serves as a cautionary tale for other participants in the crypto market. 

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Filed under: Bitcoin - @ May 2, 2024 4:18 pm