Terraform Labs Proposes $1M Penalty in SEC Lawsuit

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Lawyers representing Terraform Labs have filed a motion opposing the United States Securities and Exchange Commission’s (SEC) request for $5.3 billion in disgorgement and civil penalties against the firm and its co-founder Do Kwon.

In an April 26 filing in US District Court for the Southern District of New York, Terraform Labs’ legal team argued that the court should impose a maximum of a $1 million civil penalty. SEC lawyers asserted in the US District Court for the Southern District of New York that Terraform’s narrative was “built on lies.”  

No Disgorgement: Terraform Labs

They suggested that no injunctive relief or disgorgement should be granted, as the requested funds would have to be obtained from the Luna Foundation Guard (LFG), a “non-party” in the civil case.

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The filing stated, “To pursue disgorgement from LFG, the SEC was required to name LFG as a defendant or relief defendant, which it did not do. This statute bars an order against TFL [Terraform Labs] to disgorge LFG funds because TFL did not receive them. Those funds belong to LFG, not TFL, and the token sales from which they arose were conducted by LFG.”

$1M Civil Penalty is Appropriate

Terraform argued that a $1 million civil penalty would be “far more appropriate” than the SEC’s multibillion-dollar proposal. A separate filing from Kwon opposed the commission’s motion, claiming that providing complete details of his accounts and assets would violate his Fifth Amendment rights against self-incrimination.

On April 5, a jury found Terraform and Kwon liable for defrauding investors after a two-week trial with the SEC. Terraform stated that they were “carefully weighing [their] options and next steps” following the verdict. As of now, Judge Jed Rakoff has not ruled on the proposed remedies.

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Terraform Labs’ Founder is in Montenegro

Kwon was absent from the trial and verdict due to travel restrictions in Montenegro, where he was arrested in March 2023 for using falsified travel documents. Local authorities are currently considering extradition requests from the US and South Korea.

Interestingly, Terraform Labs filed for bankruptcy protection in the United States, and its assets and liabilities range from $100 million to $500 million. 

In March, the High Court in Podgorica, Montenegro, determined that Do Kwon should be extradited to South Korea rather than the United States. However, this decision is currently open to appeal.

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