• SEC legal battle with Terraform Labs over TerraUSD collapse continues to unfold.
• Funds allegedly diverted from investors and creditors to an “opaque slush fund” for lawyers.
• Terraform Labs faces intensified scrutiny as the SEC challenges the allocation of resources.

The U.S. Securities and Exchange Commission (SEC) has raised objections to Terraform Labs’ allocation of a $166 million retainer to the law firm Dentons.

This development comes amidst an ongoing legal tussle between Terraform Labs and the SEC, stemming from the collapse of TerraUSD and the subsequent bankruptcy filing by Terraform Labs in January 2024.

Alleged fund diversion

The SEC contends that the substantial retainer payment to Dentons represents a diversion of funds that should rightfully be allocated to investors and creditors involved in Terraform’s bankruptcy proceedings. The commission has characterized this allocation as an attempt by Terraform Labs to establish an “opaque slush fund for its lawyers,” rather than addressing the financial obligations owed to stakeholders.

The SEC’s objections extend beyond the retainer payment, as it also disapproves of Terraform’s intention to engage Dentons for legal representation and cover litigation expenses for its employees. According to the SEC, this move by Terraform Labs may be construed as an effort to circumvent potential future judgments in the SEC’s lawsuit.

Legal battle and bankruptcy

Terraform Labs and its founder, Do Kwon, are currently embroiled in a legal battle with the SEC following the collapse of TerraUSD and the LUNA token in May 2022. The fallout from these events resulted in significant losses for investors, prompting Terraform Labs to file for Chapter 11 bankruptcy protection in Delaware.

The SEC’s stance underscores the contentious nature of the legal proceedings, with the commission asserting that diverted funds could have been utilized to provide restitution to investors and creditors affected by Terraform’s bankruptcy. Despite requests for comment from CoinDesk, neither Terraform Labs nor Dentons have immediately responded to the SEC’s objections.

As the legal dispute between Terraform Labs and the SEC unfolds, the allocation of significant financial resources to legal representation remains a point of contention. The SEC’s objections to Terraform’s $166 million retainer payment to Dentons highlight the complexities involved in navigating the aftermath of TerraUSD’s collapse and subsequent bankruptcy filing.

Moving forward, stakeholders will be closely monitoring developments in the legal proceedings, as the outcome could have far-reaching implications for Terraform Labs, its investors, and the broader cryptocurrency ecosystem. With the SEC’s scrutiny intensifying, Terraform Labs faces heightened pressure to address the allegations surrounding the allocation of funds and navigate the legal challenges ahead.