In the ongoing legal battle between the United States Securities and Exchange Commission (SEC) and Terraform Labs, the regulatory agency has vehemently challenged Terraform's assertions that the alleged fraud occurred outside the jurisdiction of the United States. According to a recent filing in the U.S. District Court for the Southern District of New York, lawyers representing the SEC have filed a response opposing Terraform's arguments for reduced penalties and disgorgement in the civil case.

The SEC's filing comes in the wake of a jury verdict that found Terraform Labs and its co-founder, Do Kwon, liable for fraud related to the collapse of the TerraUSD (UST) stablecoin and the associated cryptocurrency LUNA. Terraform had previously argued that the SEC's enforcement actions represented an extraterritorial application of federal laws, as the offer and sale of tokens occurred outside the United States.

However, the SEC's lawyers have firmly rejected this claim, stating, "Defendants' arguments lack merit as they rely on a misapplication of the law and misstatement of the relevant facts." The SEC's response highlights several instances of Terraform's activities within the United States, which could potentially justify the enforcement of securities laws.

One of the key examples cited by the SEC involves the "secret role" played by a U.S. company, Jump, in attempting to restore TerraUSD's peg to the U.S. dollar. Additionally, the SEC pointed to the actions of Terraform's former communications head, who was based in California and allegedly posted a series of false and misleading tweets at Kwon's direction, crediting UST's recovery of its $1 peg to its algorithm.

Furthermore, the SEC highlighted Kwon's personal involvement in promoting UST within the United States. Specifically, Kwon is accused of touting UST in person at a conference held in New York in September 2021 and engaging with media outlets that had a significant audience within the country.

The SEC's filing comes as the regulatory agency seeks substantial penalties and disgorgement from Terraform and Kwon. According to the filing, the SEC plans to seek $3.6 billion in disgorgement from the defendants, as well as an additional $1.7 billion in "ill-gotten gains from Defendants' net sales of UST."

In contrast, Terraform's proposed judgment suggested a mere $1 million civil penalty and no disgorgement, a stark contrast to the SEC's demands. The parties involved in the civil lawsuit are scheduled to return to court on May 22, where Judge Jed Rakoff will consider the proposed remedies.

The case against Terraform and Kwon has garnered significant attention, particularly due to Kwon's legal entanglements in Montenegro. In 2023, the Terraform co-founder was arrested and sentenced to four months in prison for using falsified travel documents. He remains in the country as the courts consider extradition requests from both the United States and South Korea.

As the legal proceedings continue, the SEC's response underscores the agency's determination to hold Terraform and Kwon accountable for their alleged actions, regardless of the geographic location of the purported fraud. The outcome of this case could have far-reaching implications for the regulation of cryptocurrencies and the enforcement of securities laws in the rapidly evolving digital asset landscape.