LUNA is preparing to pay a $4 billion fine. Will Do Kwon still have to go to jail?

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24-06-13 18:13
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On June 13, Reuters reported that Terraform Labs agreed to pay $4.47 billion in a case with the SEC, the last time such a large-scale financial penalty was seen was Binance's $4 billion.

"Making this judgment will ensure the maximum return of funds to harmed investors and put Terraform out of business completely," the SEC said in court documents. "Therefore, this proposed judgment is fair, reasonable and in the public interest." Terraform and Kwon agreed to the judgment. Their lawyers did not immediately respond to requests for comment.

Half-year court battle

Recalling the collapse of LUNA two years ago, the $84 million UST sell-off triggered a terrible disaster for Terra. As the second largest public chain ecosystem, nearly $40 billion evaporated in just two days.

Although after UST triggered the death spiral, it was rumored that institutions such as Jump and Alameda reached a behind-the-scenes deal and were ready to invest $2 billion to save the market. Binance also participated in the UST defense war and forcibly set a trading floor price for the UST order book. However, the UST collapse still occurred in full view of the public, becoming the first large-scale "Baht + Lehman" event in the history of crypto development.

Related reading: "US$84 million leverages a 40 billion financial empire, the whole story of UST's collapse"

After the collapse of LUNA, the SEC accused the company and its former CEO Kwon Do-hyeong of securities fraud in February 2023, saying that they planned "billions of dollars in crypto asset securities fraud" and raised billions of dollars from investors by "offering and selling a series of interrelated crypto asset securities."

Subsequently, the news of Terraform Labs and Do Kwon's verdict has been affecting the crypto community, and the case was originally scheduled to go to trial in January 2024. On January 12, Do Kwon expressed his desire to appear in court in person and therefore requested that his trial be postponed to mid-March 2024.

$166 million "slush fund"

On January 22, in response to the SEC's securities fraud lawsuit, Terraform Labs filed for Chapter 11 bankruptcy protection, stating in the document that its assets and liabilities ranged from $100 million to $500 million, and 100 to 199 creditors.

On February 5, Han Chang-joon, former chief financial officer of Terraform Labs, was extradited to South Korea. Montenegrin police said that criminal offenses related to financial investment services, investment and capital market fraud "are punishable by life imprisonment in South Korea." But despite this, according to Lee (pseudonym), a former developer of Terraform Labs, who testified in a South Korean court, Do Kwon and Shin Hyun-seung still offered the TerraUSD stablecoin as a potential payment option to investors.

Han Chang-joon was subsequently arrested by the Seoul Southern District Prosecutors' Office on February 8 for allegedly fraudulently marketing Terra stablecoins to earn 53.6 billion won (about 40 million U.S. dollars) in proceeds, and illegal gains totaling 462.9 billion won with other accomplices.

Han was also accused of illegally recording about 100 million user electronic payment information on the Terra blockchain without permission, and manipulating the market price and trading volume of Terra and Luna coins by using "robot" programs. In addition, he is also suspected of presenting the currency issued by Terra as a fixed price, which is actually a way of operating the market within a specific price range through a large number of transactions, violating the public offering and sales regulations of the capital market.

In response to the trial, Terraform Labs paid a $166 million advance to the law firm Dentons at the end of February.

The SEC expressed strong dissatisfaction with this, accusing the huge advance payment of being a "slush fund", believing that the funds could have been used to repay the company's creditors. Terraform Labs paid $122 million to Dentons in a senior payment bond. The SEC stated that unless the law firm returns the remaining $81 million in the bond account, it should not be allowed to represent Terraform Labs and its fees should be supervised by the bankruptcy court.

Faced with the SEC's opposition, Terraform Labs raised questions and applied to the bankruptcy court for permission to hire a special litigation counsel, and requested that $6.3 million in legal fees be allocated to employees and external partners facing litigation. In the end, according to court documents, approximately $3.25 million will be used to pay employees' legal fees. On March 13, the US court allowed Terraform Labs to hire the Dentons law firm.

A sky-high fine of $4.55 billion

Unlike Binance, Terraform Labs' settlement process was not "smooth" and it had been arguing with the SEC for months over the amount of the fine.

After his arrest, Do Kwon has been detained in a black mountain prison and was tried in a Manhattan court on March 25. An SEC lawyer told the jury in Manhattan that Terraform Labs and its founder Do Kwon repeatedly lied about the success of the cryptocurrency platform.

As their case for allegedly defrauding investors draws to a close, regulators are seeking civil financial penalties against Do Kwon and Terraform and ordering them to be banned from the securities industry.

On April 6, Terraform Labs and Do Kwon were found guilty by a jury in a civil fraud case in the U.S. federal court in Manhattan. A Terraform spokesperson said the company was disappointed with the ruling and said the SEC had no authority to bring the case.

In a filing with the U.S. District Court for the Southern District of New York on April 19, the SEC asked Do Kwon and Terraform to pay approximately $4.7 billion in disgorgement and prejudgment interest following the civil case, as well as a total of $520 million in civil penalties, with Terraform paying $420 million and Do Kwon paying $100 million.

Terraform proposed a maximum civil penalty of $3.5 million, while Do Kwon proposed $800,000.

On May 1, a U.S. federal judge ordered the parties to discuss compensation packages ranging from millions to billions of dollars after a jury found Terraform Labs and its co-founder Do Kwon liable in a fraud case with the U.S. Securities and Exchange Commission (SEC).

In the further compensation plan, the SEC still requested a fine of $5.22 billion, while Terraform's legal team further reduced the amount of compensation, suggesting a civil penalty of $1 million and no payment of forfeiture proceeds.

On May 30, Terraform Labs and Do Kwon reached a preliminary "principle" settlement with the SEC on the fraud case. The final total judgment amounted to $4.55 billion, and Terraform has agreed to pay a civil penalty of $4.47 billion.

Does Do Kwon still need to go to jail?

The fine of over $4 billion is rare in the cryptocurrency circle, and only Binance's $4 billion can be compared with it.

On November 21 last year, the US regulator launched another formal attack on Binance, and the US Department of Justice issued a fine of more than $4 billion as part of a proposed solution to its years-long investigation. At the same time, CZ was also sentenced to 4 months in prison.

Related reading: "The U.S. Department of Justice issued a $4 billion fine, Binance and regulatory settlement"

Not only CZ, but also the founders who once stirred the crypto world could not escape. If SBF's 25-year prison sentence is deserved, the conviction of the founder of Tornado Cash is still controversial, and even Vitalik has provided legal funding for him.

Terraform's judgment includes $4.05 billion in disgorgement and interest, and $420 million in civil penalties. Since Terraform filed for bankruptcy in January, most of the money may not be paid. Instead, it will be considered an unsecured claim in a Chapter 11 bankruptcy case, and Terraform is in the process of liquidation.

At present, the criminal judgment against Do Kwon is still unknown. He faces a civil fine of $80 million, is prohibited from trading cryptocurrencies, and needs to transfer $204.3 million to Terraform's bankruptcy assets.

In addition, it should be emphasized that in addition to the SEC's civil lawsuit, Do Kwon is currently facing criminal charges in South Korea and the United States, and the battle between South Korea and the United States for talent is still unresolved.

Do Kwon was originally ruled in February to be extradited to the United States for trial, but in March the Court of Appeal changed the extradition to South Korea. Later, the Supreme Prosecutor's Office of Montenegro asked the Supreme Court to overturn the ruling and seek to change Do Kwon's extradition to the United States. He is still waiting for the extradition decision in Montenegro.

Terraform Labs' bankruptcy filing was intended to enable the company to continue executing its business plan while facing legal proceedings in a securities fraud case filed by the SEC. But today, according to The Block, Terraform Labs plans to sell its projects in the Terra ecosystem, including Pulsar Finance, Station Wallet, and Enterprise DAO. Terraform Labs CEO Chris Amani asked the community to take over as the company plans to dissolve its business.

“TFL has always intended to disband at some point, and that time is now,” Chris Amani said, marking the end of Terraform Labs. “We will completely cease operations.” BlockBeats will also continue to pay attention to the subsequent development of Terraform Labs and Do Kwon.

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