By
Steve Muchoki
April 26th, 2024
In its bid to navigate the legal challenges, Terraform sought permission from the bankruptcy court to engage Dentons as special litigation counsel and allocate $6.3 million to cover legal expenses for employees and external partners facing litigation.
The US Securities & Exchange Commission (SEC) is pushing back against Terraform Labs’ attempt to enlist the services of law firm Dentons US LLC and cover hefty legal costs during its bankruptcy, alleging dubious financial maneuvers to sidestep potential liabilities.
SEC’s Allegations against Terraform’s Legal Payments
According to reports, the SEC has vehemently opposed Terraform’s intentions to hire law firm Dentons and cover litigation costs for its employees during the bankruptcy process, specifically targeting a hefty $166 million retainer payment to Terraform’s legal team.
According to the SEC’s assertions, Terraform has funneled funds, totaling $166 million, to Dentons since the beginning of 2023. The SEC alleges that these transfers may have been executed with the intention of circumventing potential future judgments related to the SEC’s lawsuit, which accuses Terraform of defrauding its investors.
The SEC further contends that these funds have been diverted into what it describes as an “opaque slush fund for its lawyers,” to the detriment of investors and creditors who are seeking recompense in Terraform’s bankruptcy proceedings.
Terraform Labs, which initiated Chapter 11 protection in January, has stated that its bankruptcy filing is pivotal for challenging a December ruling that favored the SEC in its securities fraud case.
A federal judge previously determined that Terraform Labs and its founder Do Kwon violated US law by failing to register algorithmic stablecoins TerraUSD and sister cryptocurrency LUNA, whose collapse reverberated through crypto markets in 2022. The magnitude of damages that Terraform might be required to pay remains undetermined, but the company has indicated that it could surpass its existing assets.
In its bid to navigate the legal challenges, Terraform sought permission from the bankruptcy court to engage Dentons as special litigation counsel and allocate $6.3 million to cover legal expenses for employees and external partners facing litigation.
Approximately $3.25 million of this sum is designated for settling employees’ legal fees. Furthermore, Terraform intends to spend approximately $1.33 million to continue a lawsuit in the United Kingdom that looks for information from a crypto trading business to strengthen its legal case against the SEC’s action.
SEC’s Call for Enhanced Oversight and Restitution
The SEC adamantly opposes these proposed payments, asserting that they require greater scrutiny and oversight from the bankruptcy court. The SEC characterizes Terraform’s retainer payment to Dentons as “staggering” and argues that it undermines the transparency of the bankruptcy court’s insight into Terraform’s expenditure.
Notably, the majority of the retainer payments, amounting to $122 million, were transferred in the 90-day period preceding Terraform’s bankruptcy filing, potentially enabling their reclamation to reimburse other creditors, a scenario that the SEC deems as posing a conflict of interest between Terraform and Dentons.
The SEC highlighted that Dentons should not be permitted to represent Terraform, its employees, or vendors unless it returns the remaining $81 million in the retainer account and subjects its future fees to the oversight of the bankruptcy court.
Adding layers to the intrigue, the SEC alleges that a portion of these funds might have been utilized for legal representation concerning Terraform Labs’ former CEO, Do Kwon’s, unrelated criminal proceedings in Montenegro.
