US SEC Raises Concerns over Terraform Labs’ Use of Funds
The US Securities and Exchange Commission (SEC) has expressed concerns regarding Terraform Labs’ hiring of the law firm Dentons and the payment of litigation costs for its employees during the company’s bankruptcy proceedings. The SEC argues that a $166 million retainer payment made to Terraform Labs’ lawyers may have been an attempt to evade a potential judgment in the SEC’s fraud lawsuit against the company.
Terraform Labs Accused of Misusing Funds
Terraform Labs has transferred $166 million to Dentons since the beginning of 2023, allegedly diverting these funds into an “opaque slush fund for its lawyers.” The SEC claims that this action has disadvantaged investors and creditors seeking repayment in Terraform’s bankruptcy case.
Terraform Labs filed for Chapter 11 bankruptcy protection in January and plans to use the bankruptcy proceedings to appeal a December ruling that partially favored the SEC in its securities fraud case. A federal judge ruled that Terraform Labs and its founder, Do Kwon, violated US law by failing to register two digital currencies that significantly impacted the cryptocurrency markets in 2022. The exact amount of damages Terraform Labs must pay has not yet been determined, but the company is concerned that it may exceed its available assets.
Following the bankruptcy filing, Terraform sought permission from the court to engage Dentons as special litigation counsel and cover $6.3 million in legal costs for employees and external partners involved in litigation. Approximately $3.25 million is allocated to cover employees’ legal expenses. Additionally, Terraform plans to allocate around $1.33 million to sustain a lawsuit in the UK, aiming to gather evidence from a cryptocurrency trading company that could support its defense against the SEC’s claims.
The SEC argues that without increased oversight from the bankruptcy court, none of these payments should be permitted. The regulator claims that Terraform’s significant retainer payment undermines the court’s monitoring of the company’s expenditures.
Court Battle Imminent
The SEC notes that most of the retainer payments, totaling $122 million, were made within the 90 days before Terraform’s bankruptcy filing. Therefore, according to the SEC, these funds could be recovered to repay other creditors, creating a potential conflict of interest between Terraform and Dentons. The SEC alleges that Dentons should not be allowed to represent Terraform, its employees, or its vendors unless the firm returns the remaining $81 million held in the retainer account and submits future fees to bankruptcy court oversight.
The dispute between Terraform Labs, the SEC, and Dentons is expected to be addressed during a court hearing on March 5, presided over by US Bankruptcy Judge Brendan Shannon in Wilmington, Delaware. Terraform Labs and Dentons have yet to respond to these new allegations, adding to the ongoing legal troubles the crypto company has faced since its collapse.
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