SEC issues alert over Terraform Labs’ $166 million payment to Dentons during bankruptcy

The U.S. Securities and Exchange Commission (SEC) has raised significant concerns about Terraform Labs’ financial maneuvering, urging a Delaware bankruptcy court to take a closer look at its $166 million payment to law firm Dentons.

suspicious financial movements

The SEC disclosed a series of financial transactions in which Terraform Labs allegedly transferred $166 million to Dentons starting in early 2023. The SEC alleges that these transfers may have been executed strategically to avoid potential future liabilities that may have arisen as a result of the SEC’s fraud allegations. investor.

The committee argued that these funds were essentially diverted into an “opaque slush fund for lawyers,” raising concerns about the interests of investors and creditors seeking repayment in the wake of Terraform’s bankruptcy.

Legal Battle and Chapter 11 Bankruptcy

Terraform Labs, facing securities fraud charges from the SEC, filed for Chapter 11 bankruptcy in January, in part to use the bankruptcy process to challenge a December ruling in the SEC’s favor.

The ruling found that Terraform Labs and its founder Dokwon Kwon violated U.S. law by failing to register two digital currencies, causing chaos in the cryptocurrency market in 2022.

Requests for SEC Scrutiny and Oversight

The SEC asked the bankruptcy court for increased oversight, arguing in a filing that $166 million worth of retainage payments Terraform paid to Dentons threatened the court’s visibility into the company’s financial leaks.

Notably, a significant portion of the $122 million holdings were transferred in the 90 days before Terraform’s bankruptcy filing. The SEC claims this creates a potential conflict of interest between Terraform and Dentons by increasing the likelihood of clawback actions to repay other creditors.

In its petition, the SEC argues that Dentons should not represent Terraform or its affiliates unless it returns the remaining $81 million in holding accounts and places future fees under bankruptcy court supervision.

U.S. Bankruptcy Judge Brendan Shannon is scheduled to hear arguments on the matter at a court hearing scheduled for March 5 in Wilmington, Delaware.