The United States Securities and Exchange Commission (SEC) might receive only a fraction of its multibillion-dollar settlement with Terraform Labs.
A report by The Wall Street Journal revealed that in January, Terraform had assets valued at $430.1 million against liabilities of $450.9 million when it filed for bankruptcy.
As part of a settlement disclosed on June 12, Terraform Labs agreed to pay the SEC approximately $4.47 billion.
This amount includes disgorgement fines of about $3.6 billion, a civil penalty of $420 million, and prejudgment interest nearing $467 million.
However, the settlement still awaits court approval.
In bankruptcy proceedings, claim priorities dictate that secured creditors are paid first, followed by unsecured creditors, which often encompass fines and penalties owed to government entities like the SEC.
Consequently, the SEC would only receive funds after lenders and other secured creditors are compensated.
In 2023, the SEC sued Terraform Labs and its founder, Do Kwon, accusing them of selling unregistered securities and defrauding investors following the Terra ecosystem’s collapse.
Kwon has since been arrested in Montenegro, with both the U.S. and South Korea seeking his extradition.
Despite the slim likelihood of recovering funds, the SEC has portrayed the settlement as a significant penalty for “one of the largest securities frauds in U.S. history.”
The agency emphasized this point in a letter to U.S. District Judge Jed Rakoff on June 12:
“If approved, the proposed judgment will send an unmistakable deterrent message to not only those who engage in brazen misconduct, but also to all those who seek to evade the requirements of the federal securities laws by crafting new standards of behavior for crypto assets that fall under the purview of the federal securities laws.”
The Wall Street Journal also noted that fines and penalties collected by the SEC in 2023 totaled $2.8 billion.
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