SEC Challenges Terraform Labs' 'Suspicious' Dentons Legal Fees

The U.S. Securities and Exchange Commission (SEC) has questioned bankrupt blockchain protocol and payment platform Terraform Labs' "suspicious" payments of $166 million to law firm Dentons. The regulator said the massive legal fee may have been sent to avoid paying a future payment in the SEC's lawsuit against the cryptocurrency firm.

Legal fees of $166 million since the start of 2023 were "siphoned" into an "opaque slush fund for its lawyers," the SEC said, as per Reuters. Such "suspicious" payments could be detrimental to investors and creditors who will ultimately expect to be repaid in Terraform's bankruptcy, the regulator noted.

While the judge has yet to determine the total damages that Terraform should pay, the fallen crypto company, which filed for bankruptcy in January, already predicted that its fines may exceed its assets.

The regulator has asked the bankruptcy court to not allow any of the millions in payments the Terraform seeks for its legal battles, including around $3.25 million that it said will be used to pay employees' legal bills. The SEC argued that the "staggering" retainer payments, totaling $122 million, would undermine the bankruptcy court's oversight of the company's spending.

The SEC also wants law firm Dentons to be disallowed from representing Terraform, its employees or vendors and has asked the court to demand the law firm return $81 million still in the retainer account, as per the report.

A hearing on the dispute is scheduled for March 5 in Wilmington, Delaware.

The SEC's latest move comes after the blockchain firm's CEO Chris Amani told the court that Terraform's Chapter 11 bankruptcy was "critical" in its operations and should "provide an orderly process for resolving competing claims against it, and pursue an appeal of the SEC Enforcement Action."

Amani further noted that protection from its bankruptcy filing, Terraform would "likely have to liquidate after the trial and entry of final judgment."

In its February 2023 lawsuit against Terraform, the U.S. financial regulator alleged that the crypto company and its co-founder and former CEO Do Kwon orchestrated a "multibillion-dollar crypto asset securities fraud" linked to the TerraUSD (UST) and Terra (LUNA) tokens.

Kwon himself is faced with his own legal woes as he remains in Montenegro, where he was arrested in March 2023 for forging documents. His extradition to the U.S. has faced multiple problems, even as the trial date for the SEC's case against him and Terraform is due to begin on March 25. It was already postponed from the initial Jan. 29 start date to allow more time to get the fallen blockchain mogul to the U.S.