According to Reuters, US Judge Brendan Shannon has granted permission to Terraform Labs, a bankrupt cryptocurrency company, to engage Dentons for its legal representation. Shannon’s decision came during a bankruptcy court session held in Wilmington, Delaware, where he concluded that Terraform’s expenditure on legal services was a necessary and appropriate utilization of the company’s financially challenged resources.
Terraform Labs has disbursed a total of $166 million to Dentons in legal fees since the onset of 2023. Initially met with opposition from both the Securities and Exchange Commission (SEC) and Terraform’s creditors, this expenditure was contested on the grounds that it diverted funds away from the stakeholders.
In response to the objections, Dentons has agreed to refund $48 million to Terraform while consenting to increased oversight by the bankruptcy court for its future legal activities. According to court filings, Dentons intends to retain a portion of the remaining retainer to cover expenses related to a trial that will determine any penalties Terraform may face in connection with the SEC’s securities fraud lawsuit against the company.
Dentons faces a challenging case with Terraform.
Dentons lawyers find themselves in a challenging position as they navigate the legal complexities surrounding Terraform’s case. Not only are they grappling with the substantial sums they receive for defending Terraform, but their work is also under the microscope in light of ongoing lawsuits involving crypto companies and regulators. The Securities and Exchange Commission (SEC) is currently pursuing several other companies for alleged securities fraud, including notable entities like Ripple, Coinbase, and Binance.
The legal saga surrounding Terraform escalated in December when a federal judge ruled that Terraform Labs and its founder, Do Kwon, violated U.S. securities laws by neglecting to register their main assets—the now-defunct UST and LUNA (LUNC) cryptocurrencies—as securities offerings.
Originally, LUNC was a rebranded version of the original LUNA, which played a crucial role in anchoring Terra’s flagship cryptocurrency, the algorithmic stablecoin UST, to the value of the US dollar. Many initially believed UST to be foolproof, given its mechanism to maintain a $1 value through a burn/mint mechanism. Under this mechanism, creating one UST token required burning $1 worth of LUNA, and vice versa.
However, the mechanism faltered in May 2022 when a massive exodus from UST triggered a hyperinflationary spiral in LUNA V1. Two months prior, a community proposal had lowered interest rates on UST, which significantly impacted its primary use case—locking it up in Anchor to generate yield. With this major use case diminished, users began to withdraw from UST en masse, resulting in the minting of trillions of LUNA tokens. In just a week, LUNA’s token supply surged from three-quarters of a billion to a staggering 7 trillion, where it remains today.
The aftermath of this crisis reverberated throughout the industry, leading to what is colloquially referred to as Crypto Winter. Numerous companies within Terra’s ecosystem, including lenders like Celsius and Voyage, exchanges like Vauld and FTX, and hedge fund Three Arrows Capital (3AC), found themselves facing bankruptcy.
The SEC alleges that the ecosystem collapse orchestrated by Terraform resulted in damages amounting to $40 billion, underscoring the far-reaching implications of the events surrounding Terra’s downfall.
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