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The U.S. Securities and Exchange Commission has raised significant concerns over Terraform Labs’ financial maneuvers, urging the Delaware bankruptcy court to scrutinize a $166 million payment to law firm Dentons.
Questionable Financial Moves
The SEC revealed a series of financial transactions, with Terraform Labs allegedly transferring $166 million to Dentons since the beginning of 2023. The SEC argues that these transfers may have been strategically executed to circumvent potential future liabilities that could have arisen from the SEC’s accusations of defrauding investors.
The Commission asserts that these funds have essentially been diverted into an “opaque slush fund for its lawyers,” raising concerns about the interests of investors and creditors seeking reimbursement in Terraform’s bankruptcy.
Legal Battle and Chapter 11 Bankruptcy
Terraform Labs, facing allegations of securities fraud by the SEC, filed for Chapter 11 bankruptcy in January, aiming to leverage the bankruptcy proceedings to challenge a December ruling that partially favoured the SEC.
The ruling found Terraform Labs and its founder, Do Kwon, in violation of U.S. law for failing to register two digital currencies, causing disruptions in cryptocurrency markets in 2022.
SEC’s Call for Scrutiny and Oversight
The SEC, in its filing, calls for enhanced oversight from the bankruptcy court, arguing that Terraform’s substantial $166M retainer payment to Dentons threatens the court’s visibility into the company’s financial outflows.
Notably, a significant portion of the retainer, amounting to $122 million, was transferred in the 90 days leading up to Terraform’s bankruptcy filing. The SEC contends that this raises the possibility of clawback actions to repay other creditors, creating a potential conflict of interest between Terraform and Dentons.
The SEC, in its plea, asserts that Dentons should not represent Terraform or its affiliates unless it returns the remaining $81 million from the retainer account and subjects its future fees to the oversight of the bankruptcy court.
U.S. Bankruptcy Judge Brendan Shannon is set to hear arguments on this matter during a court hearing scheduled for March 5 in Wilmington, Delaware.