In a move that underscores the ongoing tensions between regulatory bodies and crypto enterprises, the U.S. Securities & Exchange Commission (SEC) has raised objections to Terraform Labs‘ financial arrangements for its legal defense during its bankruptcy proceedings, Reuters reports. The SEC’s concern centers around a substantial $166 million transferred to the law firm Dentons since early 2023, suggesting these funds might be an attempt by Terraform to shield assets from a potential adverse judgment in a fraud case brought by the SEC.
This legal battle traces back to accusations from the SEC that Terraform Labs engaged in deceptive practices, defrauding investors. The crux of the SEC’s argument lies in the claim that Terraform funneled money into what it describes as an “opaque slush fund” for its legal team, effectively prioritizing legal fees over the rightful claims of investors and creditors in the bankruptcy process.
Terraform Labs, which sought Chapter 11 protection in January, argues that bankruptcy will afford it the opportunity to contest a December court decision partially favoring the SEC. This ruling found Terraform and its founder, Do Kwon, in violation of U.S. laws for failing to register two digital currencies, which played a significant role in the tumultuous crypto market downturn in 2022.
Despite the unresolved determination of damages—anticipated to surpass Terraform’s assets—the company has petitioned the bankruptcy court to engage Dentons as its special litigation counsel and allocate $6.3 million for legal expenses covering employees and essential external partners embroiled in litigation. This request includes provisions for $3.25 million towards employees’ legal fees and an additional $1.33 million to support a UK lawsuit aimed at gathering evidence to counter the SEC’s charges.
The SEC, however, insists on greater bankruptcy court supervision over these expenditures, particularly spotlighting the “staggering” retainer to Dentons as an act undermining the court’s oversight of Terraform‘s financial dealings. With $122 million of the retainer transferred within 90 days preceding Terraform’s bankruptcy filing, the SEC suggests this sum could be subject to recovery to satisfy other creditors’ claims, thus potentially disqualifying Dentons from representing Terraform without returning $81 million remaining in the retainer and agreeing to future fee oversight.
The legal and financial drama is set to unfold further at a court hearing scheduled for March 5 in Wilmington, Delaware, presided over by U.S. Bankruptcy Judge Brendan Shannon.
This dispute emerges against the backdrop of Terraform‘s stablecoin TerraUSD‘s dramatic failure, which, alongside its sister coin Luna, erased billions in market value and catalyzed a domino effect of bankruptcies across the crypto industry, including notable entities like FTX and Celsius Network.