Securities Lawyer Discusses SEC’s Judgment Approach in Terraform Labs Case

• Marc Fagel highlights the SEC’s use of large penalties to reflect fraud severity and ensure future recoveries from defendants.
• The SEC argues Ripple’s comparison to Terraform Labs’ settlement is flawed, emphasizing different financial contexts and profit impacts.
• Terraform Labs’ $4.47 billion SEC settlement includes penalties, interest, and bars future crypto transactions involving Terra tokens.

Marc Fagel, a seasoned securities lawyer, recently shared his perspective on the ongoing SEC vs. Terraform Labs case, shedding light on the complexities of the judgment and its implications. His comments came in response to discussions on social media about the SEC’s recent actions and strategies in high-profile cryptocurrency fraud cases.

Fagel explained that the SEC often imposes large settlements, even if they are not immediately collectible, to ensure that any future recoveries from defendants are secured for the government. This approach also serves a broader purpose by highlighting the severity of the fraud to the public. He argued that if a fraud amounts to billions, a corresponding large penalty, even if uncollectible, is more appropriate than a smaller, collectible penalty. This strategy prevents the SEC from facing criticism for imposing seemingly insufficient penalties relative to the scale of the fraud.

The SEC recently addressed Ripple Labs Inc.’s opposition to its remedies motion by referencing the proposed settlement in the SEC vs. Terraform Labs case. Ripple had cited this settlement to argue for a lower penalty in their case. 

However, the SEC contended that settlements are not always indicative of what would be appropriate in a litigated context due to various influencing factors. Specifically, the SEC noted that the Terraform Labs settlement took into account the company’s bankruptcy and its agreement to significant investor returns, conditions not mirrored in Ripple’s situation. 

The SEC further argued that comparing the Terraform penalty to gross sales, as Ripple did, was flawed. Instead, they suggested comparing it to gross profits, which would justify a much higher penalty against Ripple.

Following these developments, commentators on social media, including Sherrie and Bill Morgan, supported the SEC’s stance. Sherrie pointed out the critical difference in Terraform Labs’ financial state, emphasizing that the company was in bankruptcy and divesting its assets. 

Bill Morgan echoed Marc Fagel’s earlier comments about the uncollectible nature of the penalty, highlighting that the proposed $4 billion settlement with Terraform Labs was somewhat symbolic given the company’s financial collapse. This context underscores the SEC’s argument for a higher penalty in Ripple’s case, based on its significant profits from the violative conduct.