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Thursday, April 18, 2024

Terraform Labs Faces SEC Scrutiny Over Suspicious $166 Million Payment: Report

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In a recent filing, the U.S. Securities and Exchange Commission (SEC) has urged the Delaware bankruptcy court to reject Terraform Labs’ proposal to retain Dentons U.S. LLC as its special counsel.

The SEC has raised concerns about the amount paid to Dentons, describing it as “suspicious.”

SEC Raises Concerns Over TFL’s $166M Transfer

The SEC noted that Terraform Labs transferred $166 million to the Dentons Advance Payment Retainer. Out of this total, $122 million was moved within the 90 days preceding Terraform’s bankruptcy filing.

As per Reuters, the SEC has expressed concerns that this transaction may have been intended to evade settling a forthcoming judgment in the agency’s lawsuit.

The regulator characterized the Dentons Advance Payment Retainer as an “opaque slush fund” for legal fees, suggesting that Terraform Labs could utilize these funds as a “war chest” to prolong its legal dispute with the SEC. Despite over half of the funds already being allocated to cover litigation expenses, $81 million remained in the retainer.

Furthermore, the Commission asserted that the Dentons Advance Payment Retainer was possibly being used to finance legal expenses related to former Terra CEO Kwon Do-hyeong’s criminal proceedings in Montenegro unrelated to his role at TFL.

As a result, the SEC has urged the court to appoint a fee examiner to scrutinize the retainer payment, which it deemed suspicious in timing and amount. Furthermore, the agency has asked that Dentons refrain from representing Terraform Labs unless the remaining retainer funds are refunded.

U.S. Bankruptcy Judge Brendan Shannon is slated to preside over the arguments regarding the dispute at a court hearing scheduled for March 5 in Wilmington, Delaware.

Terraform Labs Chapter 11 Proceedings

Terraform Labs, which initiated Chapter 11 proceedings in January, has indicated that its bankruptcy filing will facilitate an appeal against a December ruling favoring the SEC in a securities fraud case.

A federal judge determined that Terraform Labs and its founder, Do Kwon, breached U.S. law by failing to register two digital currencies, the collapse of which disrupted cryptocurrency markets in 2022.

The judge has yet to determine the extent of damages Terraform must pay, but the latter has expressed concerns that the amount could surpass its assets.

After the bankruptcy filing, Terraform sought approval from the bankruptcy court to engage Dentons as special litigation counsel and allocate $6.3 million towards legal costs for employees and critical external partners involved in litigation. Terraform’s court filings reveal that approximately $3.25 million will be allocated to cover employees’ legal expenses.

Terraform also looks to pay approximately $1.33 million to sustain a lawsuit in the UK to gather evidence from a crypto trading company, which it says will support its defense against the SEC lawsuit.

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