The U.S. Securities and Exchange Commission (SEC) has hit out at a "staggering" $166 million retainer payment from Terraform Labs to law firm Dentons.
Claiming that Terraform Labs had "siphoned" the money into an "opaque slush fund for its lawyers," the SEC argued that the bankrupt crypto firm should not be allowed to hire Dentons, nor pay litigation costs for employees during its bankruptcy, according to Reuters.
The regulator noted that Terraform Labs had paid $122 million into the Dentons Advance Payment Retainer within a 90-day period prior to its bankruptcy filing, adding that the money could be used to repay the firm's creditors. That creates a potential conflict of interest between Terraform Labs and Dentons, the SEC argued.
The SEC said that the law firm should not be allowed to represent Terraform Labs unless it returns the $81 million remaining in the retainer account, with its fees subject to oversight from the bankruptcy court.
The crypto firm asked the bankruptcy court for permission to hire Dentons as special litigation counsel, and requested that $6.3 million in legal costs be assigned to employees and outside partners facing litigation. Per court filings, around $3.25 million would be used to pay employees' legal bills.
Terraform Labs, the company behind the LUNA and TerraUSD cryptocurrencies, filed for voluntary Chapter 11 bankruptcy in Delaware last month. The implosion of Terra's ecosystem in 2022 sparked contagion in the crypto industry that led to the collapse of crypto firms including FTX and Three Arrows Capital, precipitating a years-long bear market.
The firm said that its bankruptcy filing would enable it to pursue a "do-or-die" appeal in the securities fraud case brought against it by the SEC.
Terraform Labs co-founder Do Kwon is currently serving a jail sentence in Montenegro, pending his extradition to the U.S. where he faces a civil fraud suit from the SEC and criminal charges from the Southern District of New York's U.S. Attorney's Office.
Edited by Stacy Elliott.