SEC Expresses Concern About Terraform Labs’ $166M Payment to Dentons During Bankruptcy Proceedings
The U.S. Securities and Exchange Commission (SEC) has expressed significant concerns about the financial activities of Terraform Labs and has urged the Delaware bankruptcy court to closely examine a $166 million payment made to the law firm Dentons.
The SEC has revealed a series of financial transactions in which Terraform Labs allegedly transferred $166 million to Dentons since the start of 2023. The SEC argues that these transfers may have been strategically carried out to avoid potential future liabilities arising from the SEC’s allegations of defrauding investors.
The Commission claims that these funds have essentially been redirected into a “secretive fund for its lawyers,” raising concerns about the interests of investors and creditors who are seeking reimbursement in Terraform’s bankruptcy case.
Terraform Labs, which is facing charges of securities fraud by the SEC, filed for Chapter 11 bankruptcy in January in an attempt to use the bankruptcy proceedings to challenge a December ruling that partially favored the SEC. The ruling found Terraform Labs and its founder, Do Kwon, in violation of U.S. law for not registering two digital currencies, which caused disruptions in the cryptocurrency markets in 2022.
In its filing, the SEC has called for increased oversight from the bankruptcy court, arguing that Terraform’s significant $166 million payment to Dentons threatens the court’s ability to monitor the company’s financial outflows. Importantly, a large portion of the payment, totaling $122 million, was made within the 90 days leading up to Terraform’s bankruptcy filing. The SEC asserts that this raises the possibility of clawback actions to repay other creditors, potentially creating a conflict of interest between Terraform and Dentons.
The SEC has stated that Dentons should not represent Terraform or its affiliates unless it returns the remaining $81 million from the payment and agrees to have its future fees overseen by the bankruptcy court.
U.S. Bankruptcy Judge Brendan Shannon is scheduled to hear arguments on this matter during a court hearing on March 5 in Wilmington, Delaware.