SEC challenges Terraform Labs’ ‘suspicious’ $166 million payment to lawyers in court filing

The U.S. Securities and Exchange Commission asked the Delaware Bankruptcy Court to deny Terraform Labs the use of Dentons US LLC as special counsel in a filing submitted Tuesday, saying a “suspicious” amount was paid to Dentons .

The SEC said in the filing that Terraform Labs transferred a “staggering” $166 million into Dentons’ prepayment hold, of which $122 million was transferred in the 90 days before filing for bankruptcy. The SEC argued that the move appears aimed at removing assets from the company that could be used to pay any judgment resulting from the agency’s enforcement actions.

The agency claimed the $122 million was transferred to an “opaque slush fund” for lawyers, which Terraform Labs could then use as a “war chest” to pursue the legal dispute against the SEC.

More than half of the amount paid to Dentons has already been used to cover litigation costs, while $81 million remained in Dentons’ prepayment provision, according to the filing. The SEC argued that Dentons should not be allowed to represent Terraform Labs unless it returned the remaining amount.

The regulator added that Dentons’ prepayment withholding appears to be used to cover consulting bills in former Terra CEO Kwon Do-hyeong’s criminal action in Montenegro, which is unrelated to his work at Terraform Labs.

The SEC also asked the court to appoint a fee examiner on the retainer payment that it claimed was suspicious in terms of timing and amount.

Terraform Labs did not immediately respond to The Block’s request for comment.

Chapter 11 Bankruptcy

Terraform Labs has filed an application Chapter 11 Bankruptcy in the U.S. Bankruptcy Court for the District of Delaware on Jan. 21, with assets and liabilities estimated between $100 million and $500 million, according to the filing at the time. He said in January that bankruptcy protection would allow the company to appeal against the SEC.

The company was behind the algorithmic stablecoin TerraUSD and sister cryptocurrency Luna, both of which collapsed in May 2022. The SEC accused the company and Kwon for fraud in February 2023. Kwon is currently awaiting extradition from Montenegro, where he was arrested in March last year.

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