The SEC has reportedly 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 advance payment. to Terraform’s legal team.
In its attempt to overcome legal challenges, Terraform asked the bankruptcy court for permission to hire Dentons as special litigation counsel and allocate $6.3 million to cover legal expenses for employees and outside partners facing litigation.
The US Securities and Exchange Commission (SEC) rejects Terraform Labs’ attempt to retain the services of law firm Dentons US LLC and cover high legal costs during its bankruptcy, alleging dubious financial maneuvers to avoid potential liabilities.
SEC Allegations Against Terraform Legal Payments
According to the SEC’s claims, Terraform has funneled funds, totaling $166 million, to Dentons since early 2023. The SEC alleges that these transfers may have been executed with the intent to avoid potential future judgments related to the lawsuit. from the SEC, which accuses Terraform of defrauding its investors.
The SEC further maintains that these funds have been diverted into what it describes as an “opaque fund to its lawyers,” to the detriment of investors and creditors seeking compensation in Terraform’s bankruptcy proceedings. Terraform Labs, which entered Chapter 11 protection in January, has declared that its bankruptcy filing is critical to challenging a December ruling that favored the SEC in its securities fraud case.
A federal judge previously found 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 extent of the damages Terraform could face pay remains undetermined, but the company has indicated it could outgrow its existing assets. In its attempt to overcome legal challenges,
Terraform asked the bankruptcy court for permission to hire Dentons as special litigation counsel and allocate $6.3 million to cover legal expenses for employees and outside partners facing litigation. Approximately $3.25 million of this amount goes to pay employees’ legal fees.
Additionally, Terraform intends to spend approximately $1.33 million to pursue a lawsuit in the United Kingdom seeking information from a cryptocurrency trading company to strengthen its legal case against the SEC’s action.
SEC Call for Better Oversight and Restitution
The SEC strongly opposes these proposed payments, stating that they require greater scrutiny and oversight by the bankruptcy court. The SEC characterizes Terraform’s advance payment to Dentons as “staggering” and maintains that it undermines the transparency of the bankruptcy court’s view of Terraform’s expenses.
Notably, the majority of the advances, amounting to $122 million, were transferred in the 90-day period prior to Terraform’s bankruptcy filing, potentially allowing it to claim to repay other creditors, a scenario that SEC believes this poses a conflict of interest between Terraform and Denton.
The SEC noted that Dentons should not be allowed to represent Terraform, its employees or suppliers unless it repays the remaining $81 million in the advance account and subjects its future fees to bankruptcy court oversight.
Adding layers to the intrigue, the SEC alleges that a portion of these funds could have been used for legal representation in connection with the unrelated criminal proceedings of former Terraform Labs CEO Do Kwon in Montenegro.
By Leonardo Perez
