Terraform Labs Faces Legal Dispute with SEC over $166 Million “Slush Fund”
Terraform Labs, the company behind the collapsed Terra cryptocurrency project, is currently embroiled in a legal battle with the U.S. Securities and Exchange Commission (SEC) over allegations of a $166 million “slush fund” as its bankruptcy proceedings unfold.
The SEC has raised objections to Terraform Labs’ retention of law firm Dentons and its coverage of litigation expenses for employees during the bankruptcy proceedings. The objection stems from a $166 million payment made to the lawyers, with the SEC claiming that a portion of this amount was transferred to an opaque slush fund to evade potential judgments.
In response, Terraform Labs filed a request on March 4, emphasizing the need for authority to pay legal expenses. The company argues that these funds are essential for defending against the SEC’s litigation and complying with the ongoing Department of Justice (DOJ) investigation. It denies any wrongdoing and asserts that the funds were used for legitimate legal defense costs rather than personal enrichment.
Terraform Labs further states that the SEC’s objections are based on a misunderstanding of the funds and an unfair attempt to limit its access to legal representation. The company believes that the SEC’s true agenda is to divert focus and distract ahead of the upcoming trial on March 25.
The SEC has maintained its stance against Terraform Labs retaining Dentons or covering employee litigation costs throughout the months-long legal dispute. The commission also alleges that approximately $122 million was transferred to attorneys shortly before Terraform Labs declared bankruptcy, some of which was used for legal expenses.
Terraform Labs refutes these allegations, emphasizing that the funds were allocated for valid legal defense costs and not personal gain. The company filed for Chapter 11 bankruptcy on January 21 in order to pursue an appeal against the SEC.
More Bankruptcies during the Crypto Winter of 2022
The crypto industry witnessed a series of notable bankruptcies during the crypto winter of 2022, including high-profile Web3 firms such as Three Arrows Capital (3AC), BlockFi, FTX, and Celsius.
FTX, a cryptocurrency exchange based in the Bahamas, experienced a dramatic collapse in November 2022, leading to its bankruptcy filing. The company’s downfall was attributed to a lack of proper financial controls and a surge in customer withdrawals, resulting in an $8 billion deficit in FTX’s accounts. This bankruptcy filing sent shockwaves through the cryptocurrency industry, highlighting the inherent risks and uncertainties present in the market.
The events leading to FTX’s bankruptcy included unsuccessful acquisition attempts by Binance, significant customer withdrawals, and the suspension of withdrawals by affiliated companies like BlockFi due to their exposure to FTX.
Ongoing investigations are focused on potential legal violations related to FTX’s financial practices, including misappropriation of customer deposits and misleading financial statements. The aftermath of FTX’s collapse is still unfolding, with discussions centered around potential restructuring and new ownership for the defunct exchange.
Hot Take: Terraform Labs’ Legal Battle Continues
Terraform Labs’ legal dispute with the SEC over the alleged $166 million “slush fund” shows no signs of resolution as the bankruptcy proceedings continue. The company maintains its need for authority to pay legal expenses while defending against the SEC’s litigation and complying with ongoing DOJ investigations.
The SEC’s objections and allegations have been met with rebuttals from Terraform Labs, which argues that the funds were used for legitimate legal defense costs and not personal enrichment. The company believes that the SEC is attempting to limit its access to legal representation and distract from the upcoming trial.
Meanwhile, the crypto industry has witnessed a wave of bankruptcies during the crypto winter of 2022, with FTX’s dramatic collapse being one of the most significant. The aftermath of FTX’s bankruptcy filing continues to unfold, with investigations focused on potential legal violations and discussions surrounding the future of the defunct exchange.
As Terraform Labs and FTX navigate their respective legal battles and bankruptcy proceedings, these cases serve as a reminder of the challenges and uncertainties faced by companies operating in the cryptocurrency industry.
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