Judge Greenlights $4.5B Settlement Between Terraform Labs and SEC

Chris Amani, the CEO of Terraform Labs, also announced that the firm will cease operations, and the community will need to take over ownership of the chain.

A U.S. district court approved a $4.5 billion settlement between Terraform Labs, its co-founder Do Kwon, and the SEC. As part of the settlement, Terra and Kwon are effectively banned from the crypto industry. Terraform Labs now plans to wind down operations, and transfer control of the Terra blockchain to the community. Meanwhile, Tesla shareholders filed a lawsuit against CEO Elon Musk, alleging his xAI startup is diverting AI talent and resources away from Tesla.

Judge OKs Settlement Between Terraform Labs & SEC

A United States district court judge has approved a $4.5 billion settlement between Terraform Labs, its co-founder Do Kwon, and the Securities and Exchange Commission (SEC). New York District Court Judge Jed Rakoff signed off on the deal on Jun. 13. This settlement also effectively bans Terra and Kwon from participating in the crypto industry.

Under the agreement, Terraform will pay nearly $3.6 billion in disgorgement, a $420 million civil penalty, and around $467 million in prejudgment interest. Additionally, Kwon will pay $110 million in disgorgement, $14.3 million in prejudgment interest, and an $80 million civil penalty on a joint basis with Terraform.

The SEC sued Terraform and Kwon in February of 2023, and charged them with securities law violations and fraud. SEC Chair Gary Gensler stated that this case serves as proof that the economic realities of a product, rather than labels or hype, determine its status as a security under the law. He also pointed out that the fraudulent activities of Terraform and Do Kwon caused major losses for investors, in some cases wiping out entire life savings. This is why Gensler firmly believes it is important for firms to comply with the law to protect investors.

Do Kwon is currently in custody in Montenegro after he served four months in jail for using fake passports to attempt to leave the country in March last year. He has been released until the courts decide on competing extradition requests from the U.S. and South Korea, where he faces criminal charges.

Terraform's SEC Payout Uncertain

The SEC may receive only a small portion of its multibillion-dollar settlement with Terraform Labs. According to The Wall Street Journal, Terraform had assets worth $430.1 million against liabilities of $450.9 million when the firm filed for bankruptcy in January.

In bankruptcy proceedings, claims are prioritized, with secured creditors typically being paid first, followed by unsecured creditors, which often include fines and penalties owed to government agencies like the SEC. Therefore, the SEC might have to wait until lenders and other secured creditors are paid before receiving any funds.

Despite the low likelihood of receiving funds, the SEC has reportedly described the settlement as a fair penalty for “one of the largest securities frauds in U.S. history.”

Terraform Labs Winds Down

Chris Amani, the CEO of Terraform Labs, announced that the firm will cease operations after a $4.47 billion settlement with the SEC. The company plans to sell key projects in the Terra ecosystem and transfer control of the Terra blockchain to the community.

According to Amani, Terraform Labs always intended to dissolve at some point, and the recent settlement has accelerated this decision. “We were well positioned to accelerate things if we had won the trial, but unfortunately, we lost and as a result, can no longer operate.”

Amani, who took over from Do Kwon in July of 2023, confirmed the intent to wind down operations and burn both unvested and vested holdings. A community proposal to burn all unvested Luna will be posted soon, and Terraform Labs will also burn any remaining vested tokens in their wallets.

The CEO emphasized the need for community-led governance of the Terra and Terra Classic blockchains, which has elicited mixed reactions from the community. While some are more optimistic about the community shift toward Terra Classic, others critiqued past leadership.

The decision to dissolve also impacted the market, with the prices of LUNA and LUNC falling by 2.5% and 3.9%, respectively over the last 24 hours of trading.

What Happened With Terraform Labs?

Terraform Labs was founded in 2018, and used blockchain technology to build a decentralized finance network. The core of the network revolved around TerraUSD and its sister token, Luna, which together formed an algorithmic stablecoin system. TerraUSD, known by its ticker UST, was designed to maintain a value of 1 USD by utilizing Luna (LUNA) as a backing cryptocurrency.

Terraform Labs, also known simply as Terra, was established by Do Kwon, a Stanford University-educated former engineer from Apple and Google. The innovative TerraUSD/Luna ecosystem quickly gained traction, and during the massive crypto market surge, LUNA's value soared to almost $120 per token by March of 2022. This meteoric rise attracted a very dedicated fanbase who called themselves "Lunatics." Do Kwon was also called the "King of the Lunatics."

However, in May 2022, Terra faced a catastrophic collapse very similar to a bank run, as confidence in the tokens plummeted and investors rushed to exit. By May 16, both TerraUSD and Luna had lost almost all their value, leading some media outlets to label the situation as a Ponzi scheme or even a rug-pull scam.

Tesla Shareholders Sue Musk

In other legal news, Tesla shareholders have filed a lawsuit against CEO Elon Musk and the company's board, alleging that Musk's xAI startup is a competing entity siphoning off AI talent and resources from Tesla. This lawsuit was filed on the same day as a shareholder vote to restore Musk's $44.9 billion pay package that a Delaware judge threw out in January.

The Cleveland Bakers and Teamsters Pension Fund, Daniel Hazen, and Michael Giampietro lodged the complaint in Delaware’s Chancery Court. They claim that Musk diverted crucial talent and resources away from Tesla to xAI and raised large amounts of money for the startup while promoting its access to Tesla’s AI data.

The shareholders also claim that xAI hired several key AI-focused employees from Tesla, including Ethan Knight, Tesla’s computer vision team lead, in March 2024. They also referred to a CNBC report that revealed that Musk directed Nvidia to send GPUs, essential for AI models, to xAI and X instead of Tesla. Musk ended up justifying the move by stating the GPUs would otherwise remain unused.

The lawsuit also criticizes the Tesla board for failing to address Musk's actions, and accuses them of neglecting their fiduciary duties and allowing Musk to create substantial AI-related value outside of Tesla.

The lawsuit now seeks the return of the diverted value to Tesla. Tesla’s shares have dropped by 26+% this year but saw a slight increase on Jun. 13.

The shareholders also pointed to Musk's January post on X, where he shed some light on his discomfort with advancing Tesla’s AI and robotics efforts without holding approximately 25% voting control, suggesting he founded xAI to develop products he initially intended for Tesla.