In a significant development in the ongoing legal battle between the United States Securities and Exchange Commission (SEC) and Terraform Labs, a jury has found the blockchain protocol and its co-founder Do Kwon liable for civil fraud over the crash of the Terra ecosystem in 2022. 

In response, the SEC has filed a motion seeking billions of dollars in disgorgement and civil penalties against the defendants.

SEC Scores Victory As Jury Finds Terraform Labs And Do Kwon Guilty

The SEC’s initial lawsuit, filed in February 2023, accused Terraform Labs and Do Kwon of orchestrating a large-scale crypto scam involving the sale of various digital assets, particularly LUNA and the algorithmic stablecoin Terra USD (UST). 

Following the recent verdict in the civil case, the jury has determined that the defendants are indeed responsible for fraud, providing the SEC with a significant boost in its ongoing efforts to crack down on fraudulent activities within the digital asset industry.

According to the SEC’s motion filed on April 5, 2024, the jury returned a verdict in favor of the SEC on all counts. The SEC is now seeking relief: an injunction against Terraform Labs and Do Kwon to prevent further violations of the securities laws and joint and several disgorgements of around $4 billion.

In addition, the SEC is seeking $545 million in prejudgment interest, a civil penalty of $420 million for Terraform Labs and $100 million for Do Kwon, a conduct-based injunction against the defendants, an officer and director bar against Do Kwon, and a declaration that the fraud-related monetary sanctions imposed on Terraform Labs are nondischargeable in bankruptcy.

Divergent Views On Remedies

The SEC and the defendants, Terraform Labs and Do Kwon, have submitted briefs outlining their proposed remedies in the civil case. 

Terraform Labs has sought a maximum civil penalty of $3.5 million, while Do Kwon has requested a penalty of $800,000. 

However, the SEC’s motion also seeks a conduct-based injunction, prohibiting Terraform Labs from participating in crypto asset transactions and engaging in activities to induce such transactions.

While the defendants argue against injunctive relief and disgorgement, Terraform Labs maintains that the SEC must meet a “higher burden of proof” to obtain a conduct-based injunction, as it would restrict legally permissible conduct. 

The defense asserts that injunctive relief and disgorgement should not be granted, and any civil penalty should be determined based on the SEC’s evidence of “domestic token sales violations.”

As the case progresses, the court’s decision on the SEC’s motion for penalties will have far-reaching implications for Terraform Labs, Do Kwon, and the wider digital asset industry.

As the market rebounds from a significant correction, the protocol’s native token, Luna Classic (LUNC), has experienced a notable price drop of over 25% in the past month alone. 

However, a modest recovery of 2% in LUNC’s price over the last 24 hours, bringing its current trading price to $0.0001128.

Featured image from Shutterstock, chart from TradingView.com