On March 3, crypto company Terraform Labs initiated legal action against the US Securities and Exchange Commission (SEC) in response to the regulator’s objection to a $166 million retainer paid to special litigation counsel Dentons.
The SEC contended that the substantial payment by the crypto firm was an effort to evade paying creditors. Terraform Labs countered this assertion in its court filing, labeling the SEC’s objection as “government overreach.” They argue that it is intended to divert attention and create an unfair disadvantage for them.
Legal Expenses Versus Creditor Liabilities
Terraform Labs faces multiple legal challenges, including a civil enforcement action and a grand jury investigation in the Southern District of New York (SDNY).
According to the filing, granting the motion would enable the company to formulate legal strategies, obtain testimony, and gather crucial information from knowledgeable employees to mount a defense against the SEC Enforcement Action.
The now-defunct crypto firm is seeking court approval to override the SEC’s objection and cover its legal expenses. It argues that the objection jeopardizes its day-to-day operations.
Dentons contends that Terraform Labs’ ability to defend itself would be significantly compromised if the court does not overturn the objection.
Although these concerns appear valid, the SEC contends that the crypto company should not be permitted to cover legal fees or spend millions of dollars while undergoing bankruptcy proceedings.
In particular, the SEC disclosed that Terraform Labs transferred $122 million to the Dentons Advance Payment Retainer within 90 days before filing for bankruptcy.
The financial regulatory body asserts that both parties may have a potential conflict of interest. Therefore, the prominent law firm should only represent Terraform Labs if it reimburses the funds to the retainer account.
Initially, Terraform sought approval from the bankruptcy court to engage external legal counsel. Additionally, the crypto company petitioned for $6.3 million to be allocated for employees and external partners to cover legal expenses.
Terraform’s Troubles and Do Kwon’s Bold Departure
In 2022, Terraform Labs, renowned for its creation of the algorithmic stablecoin TerraUSD (UST) and LUNA cryptocurrencies, encountered significant turmoil when both stablecoins experienced a catastrophic decline, plunging into a death spiral. The company, along with its founder, Do Kwon, encountered numerous challenges in the aftermath of UST’s collapse.
The downfall of UST triggered a crypto market crash and a ripple effect that resulted in the closure of other entities, including FTX.
Currently, Do Kwon and Terraform Labs’ former CFO, Chang-joon Han, are serving a four-month prison sentence in a Montenegro facility for possession of counterfeit travel documents.
While both individuals are sought after for their involvement in the collapse of the LUNA ecosystem and face fraud charges spanning multiple continents, Do Kwon is entangled in an extradition battle between the US and Montenegro.
Recently, Kwon achieved success in his extradition appeal as a Montenegro court overturned the previous ruling. Consequently, the case will be retried following the decision by the Appellate Court of Montenegro, which invalidated a prior verdict from the High Court. Last month, Han was extradited to South Korea.
