SEC to Get Fraction of Terraform Settlement

The United States Securities and Exchange Commission (SEC) may find itself receiving only a small portion of the multibillion-dollar settlement it reached with Terraform Labs. Reports from The Wall Street Journal indicate that as of January, when Terraform Labs filed for bankruptcy, the company possessed assets valued at $430.1 million compared to liabilities amounting to $450.9 million. This financial state casts doubt on the SEC’s ability to collect the full settlement.

Terraform Labs had agreed to a settlement involving payments totaling around $4.47 billion, which includes disgorgement fines of approximately $3.6 billion, a civil penalty of $420 million, and nearly $467 million in prejudgment interest. This agreement was revealed on June 12. It’s important to note that the settlement is still subject to court approval and has not yet been finalized.

In bankruptcy proceedings, the order in which claims are paid is crucial. Secured creditors are usually given priority, being paid first before any funds can go to unsecured creditors. This latter group often includes fines and penalties owed to government entities such as the SEC. Therefore, in this scenario, the SEC will have to wait in line behind lenders and other secured creditors to receive its share of the funds, if any remain.

The SEC took legal action against Terraform Labs and its founder, Do Kwon, in 2023, accusing them of selling unregistered securities and defrauding investors within the Terra ecosystem. Following these allegations, Kwon was apprehended in Montenegro, and both the United States and South Korea are seeking his extradition to face charges.

Despite the unlikelihood of securing the full amount, the SEC has reportedly characterized the settlement as a significant penalty directed at “one of the largest securities frauds in U.S. history.” They expressed this sentiment in a letter to U.S. District Judge Jed Rakoff on June 12, stating that if the court approves the judgment, it will send a strong deterrent message. The agency emphasized that it would alert not just those who engage in explicit misconduct but also those attempting to bypass federal securities laws by developing new behavioral standards for crypto assets.

The SEC’s decision to pursue such a large settlement underscores the agency’s commitment to maintaining the integrity of federal securities laws, especially in the rapidly evolving cryptocurrency sector. The settlement is intended to set a precedent that even innovative financial instruments like crypto assets are not beyond regulatory scrutiny and enforcement.

This case highlights the financial vulnerabilities that can be associated with companies operating within the cryptocurrency space. The significant discrepancy between Terraform Labs’ assets and liabilities sheds light on the financial instability that can underpin such firms, raising questions about their long-term viability and investor protection.

According to reports, the total fines and penalties collected by the SEC in 2023 amounted to $2.8 billion. This case against Terraform Labs significantly contributes to the agency’s enforcement actions for the year, illustrating its active role in regulating the complex and often opaque cryptocurrency landscape.