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SEC scrutinizes Terraform Labs’ US$166 mln legal retainer

source-logo  forkast.news 29 February 2024 22:33, UTC

The U.S. Securities and Exchange Commission (SEC) has challenged Terraform Labs’ massive legal retainer amid bankruptcy proceedings, alleging potential misuse of funds and conflict of interest, Reuters reported.

The SEC has raised concerns over a $166 million payment made by Terraform Labs to the law firm Dentons, suggesting that the funds could be better used to settle with investors following the company’s bankruptcy.

The regulator has highlighted that US$122 million of the payment was made just 90 days before Terraform Labs filed for bankruptcy, describing the funds as “an opaque slush fund” that could serve as a war chest in Terraform Labs’ ongoing legal battle with the SEC.

The SEC has suggested that the substantial sum could be redirected to repay creditors and investors who suffered losses after Terraform Labs’ bankruptcy filing. The company had previously sought court permission to hire Dentons as special counsel, with legal fees reaching $6.3 million, including $3.25 million earmarked for employees’ legal bills.

Despite pending lawsuits, the SEC has argued that such large payments could obscure the company’s spending and that investors would benefit more if the funds were allocated to them.

The SEC has also pointed out a potential conflict of interest between Dentons and Terraform Labs, emphasizing the need for more oversight from the bankruptcy court. The regulator has urged the court to prevent Dentons from representing Terraform Labs until the law firm refunds US$81 million remaining in the retainer account.

Additionally, the SEC has called for future fees incurred by Terraform Labs to be subject to the court’s oversight to ensure the preservation of the company’s assets and limit amounts payable to investors.

The SEC’s filing also implicates Terraform Labs’ former CEO, Kwon Do-hyung, suggesting that the retainer could be used to cover his legal expenses in Montenegro.

A Montenegro judge recently ruled in favor of Kwon’s extradition to the U.S.