SEC Challenges Terraform Labs Over Legal Fund Concerns Amid Bankruptcy

The U.S. Securities and Exchange Commission (SEC) is challenging Terraform Labs' attempt to hire the legal firm Dentons US LLC and to fund significant legal expenses amid its bankruptcy situation, pointing out concerns over financial strategies aimed at avoiding liabilities. The SEC's main issue is with Terraform's plan to engage Dentons for legal support and to pay litigation costs for its team during bankruptcy. The SEC is specifically troubled by a large $166 million advance to Terraform's legal advisors.

The SEC alleges Terraform directed $166 million to Dentons since early 2023, insinuating these moves were designed to dodge future legal settlements stemming from the SEC's claims of investor deception by Terraform. The SEC criticizes the use of these funds for what it considers a "secretive fund for attorneys," arguing this disadvantages investors and creditors seeking compensation in Terraform's bankruptcy. After filing for Chapter 11 protection in January, Terraform contends this step is essential for disputing a December decision that went in favor of the SEC in a securities fraud lawsuit.

A federal court previously found Terraform Labs and its founder, Do Kwon, in violation of U.S. law for not registering its TerraUSD and LUNA cryptocurrencies. The failure of these currencies had widespread effects on the crypto markets in 2022. The potential financial repercussions for Terraform are still unclear but might exceed the firm's current resources. To address these legal challenges, Terraform has asked for court permission to employ Dentons as special litigation counsel and allocate $6.3 million for legal fees for its staff and partners involved in litigation. Of this, $3.25 million is allocated for staff legal fees, and $1.33 million for pursuing a UK lawsuit to collect evidence against the SEC's allegations.

The SEC strongly opposes these financial arrangements, demanding tighter control and oversight by the bankruptcy court. It describes the retainer to Dentons as "exorbitant" and a barrier to the court's financial oversight of Terraform. The SEC highlights that $122 million of the retainer was paid just before Terraform's bankruptcy filing, suggesting these funds could be recovered to benefit other creditors, presenting a potential conflict of interest between Terraform and Dentons. The SEC insists Dentons should not represent Terraform or its affiliates unless it refunds the $81 million left in the retainer account and subjects its future fees to court supervision. Additionally, the SEC suspects some of these funds were used for legal defenses for Terraform Labs' former CEO, Do Kwon, in unrelated criminal cases in Montenegro, complicating the scenario further.