SEC May Receive ‘Only a Fraction’ of Terraform’s Settlement

SEC May Receive Only a Fraction of Settlement Due to Bankruptcy Creditor Prioritization

The U.S. Securities and Exchange Commission (SEC) stands to gain only a small fraction of the Terraform Labs company’s massive settlement in the event they go bankrupt, according to the most recent news.

Terraform Labs’ Financial Status and Settlement Details

According to The Wall Street Journal, Terraform Labs had $430.1 million in assets versus liabilities of $450.9 million in January when the company filed for bankruptcy. However this business hardship has not deterred Terraform Labs who is ready to pay them almost $4.47 billion as a settlement on June 12 report shows. The settlement covers disgorgement fines equal to nearly $3.6 billion, a civil penalty of $420 million, and prejudgment interest that reaches close to $467 million. Yet, the settlement is still pending court approval.

Creditor Prioritization in Bankruptcy

A feature of bankruptcy law is barriors being used to rank the priority for claims. Secured creditors like banks and those with mortgage interests are the priority claimants in the order of claims and discharges of the estate. Next are the unsecured creditors such as levies and fines/collections owed to governmental authorities like the SEC. Accordingly, them would have to wait until lenders and other secured creditors are paid before receiving any funds from Terraform Labs.

Background of the Case

The SEC sued Terraform Labs and Do Kwon in 2023 and issued a lawsuit against the founder for conducting the unregistered security sale and misleading the investor who was lost in the Terra ecosystem. Kwon has been seized at the present time in Montenegro. The United States and South Korea are vying for his extradition.

SEC’s Perspective on the Settlement

Reporting from their side, the SEC holds the most unlikely prospects of receiving funds; they, however, see the settlement as a fair penalty for “one of the largest securities frauds in the history of the U.S.” Besides that, the authority underscored the restraining thereof in the proposed judgment. In particular, the agency “theory of the case” as the defendant understood itin a letter to U.S. District Judge Jed Rakoff is mentioned thus:

“The proposed judgment once approved would communicate the strong message that not only those who perpetrate blatant misconduct but also the ones who wish to bypass federal securities regulations by creating new laws for crypto assets that are covered by the federal securities laws will be sanctioned.”


SEC’s Recent Enforcement Actions

The article reported them obtained $2.8 billion in fines and penalties collected—the editorial noted. Having this figure in mind, we can detect that this number mirrors the SEC’s determination to prevent fraudulent actions in the financial and crypto markets.