Terraform’s lawyers return $48 million amid legal fee controversy

abdelaziz Fathi

Terraform Labs has been granted approval by U.S. Bankruptcy Judge Brendan Shannon to cover legal expenses with its remaining funds.

Terraform

This decision comes despite objections from creditors, the U.S. Securities and Exchange Commission (SEC), and the U.S. Justice Department regarding the bankruptcy proceedings initiated by Terraform in January 2024.

Concerns were raised last month over Terraform’s allocation of up to $166 million in retainer payments to its legal team since 2023, a move criticized for diverting essential funds away from creditors. This big outlay represented a potential risk to the assets available for creditor repayment amidst the ongoing bankruptcy case.

In a balancing act of judicial oversight and corporate necessity, Judge Shannon deemed the legal expenditures a “necessary appropriate” application of Terraform’s dwindling resources.

Meanwhile, Dentons agreed to return $48 million to Terraform and accepted additional oversight from the bankruptcy court moving forward.

The SEC has particularly taken issue with Terraform’s decision to hire the law firm Dentons, arguing that such a move is designed to shield funds from potential judgments in the lawsuit related to the collapse of TerraUSD.

Terraform Labs, alongside its founder Do Kwon, is involved in legal proceedings in the United States. They are charged by the SEC in connection with the dramatic downfall of its stablecoin, TerraUSD, and its sister token, LUNA, in May 2022. The implosion of these digital assets erased billions in investor value, leading Terraform Labs to seek Chapter 11 bankruptcy protection in Delaware in January 2024.

The SEC’s filing suggests that Terraform’s hefty payment to Dentons constitutes an attempt to divert company assets potentially needed to satisfy future legal judgments. Out of the $166 million sent to Dentons, $122 million was transferred within the 90 days leading up to the bankruptcy filing, raising suspicions about the timing and intent behind these transactions.

According to the SEC, a significant portion of the retainer has already been spent on litigation costs, with $81 million still sitting in the Dentons Advance Payment Retainer. The SEC’s contention is that the retainer is being used as a “war chest” for Terraform Labs to fuel its legal battle, including covering expenses for Do Kwon’s unrelated criminal proceedings in Montenegro.

The regulator’s objections extend to Terraform’s ability to cover legal fees for its employees and the appropriateness of Dentons representing the company without returning the remaining retainer amount. Additionally, the SEC is advocating for the appointment of a fee examiner to scrutinize the retainer payment, deemed suspicious in both timing and magnitude.

The bankruptcy filing in January indicated the company’s assets and liabilities range between $100 million and $500 million.

Many enforcement authorities and financial regulators, as well as the Interpol, were already on the hunt for Kwon for his alleged involvement in the collapse of terraUSD (UST) stablecoin and the Terra ecosystem.

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