The United States Securities and Exchange Commission (SEC) has flagged Terraform Labs $166 million in payments to Denton since 2023.

In a new filing, the financial regulator opposed the retainer payment to the law firm arguing that Terraform Labs should not retain their services during the trial, Reuters reported.

SEC goes after bankrupt Terraform Labs’ $166 mln ‘slush fund’ for Dentons https://t.co/LDY9z1F5RC pic.twitter.com/oVYIUooNiP

— Reuters (@Reuters) February 29, 2024

The SEC alleged that Terraform Labs has paid $166 million to the lawyers as a retainer since 2023 adding that those sums may be to avoid paying a future judgment in the substantive lawsuit.

It was disclosed that $122 million was paid 90 days before the company’s bankruptcy filing and flagged as “an opaque slush fund.” The funds could also be used as a war chest in the ongoing legal battle with the SEC.

SEC Suggests Funds Should be Used to Settle Investors

The regulator suggests that the sum could be channeled to repay creditors and investors who lost assets after the bankruptcy filing.

Terraform Labs had previously asked the court to grant permission to hire Dentons as special counsel with a cost hitting $6.3 million. The legal fees include a $3.25 million earmarked for employees’ legal bills. Other payments by the firm include $1.3 million for a pending lawsuit in the UK.

Terraform Labs claims that fact-finding from the lawsuit will help in its defense against the SEC. Despite the pending lawsuits, the SEC argued that huge payments to the firm could undermine the visibility of the company’s spending. Furthermore, investors stand to benefit if the funds are channeled that way.

The regulator also pointed to a potential conflict of interests between Dentons and Terraform Labs still based on investors receiving the money.

“The SEC said that none of those payments can be allowed without more oversight from the bankruptcy court, arguing Terraform’s “staggering” retainer payment had served to undermine the bankruptcy court’s visibility into Terraform’s spending,” Reuters wrote.

Per written arguments, the regulator urged the court not to allow Denton to represent Terraform Labs until the firm refunds $81 million left in the retainer account.

Former Terraform Labs CEO Roped In

Future fees incurred by the company should also be subject to the court’s oversight to limit amounts payable to investors and to preserve the company’s assets.

In a move that links its former CEO to the matter, the SEC alleged that the sum in the Denton Advance Payment Retainer could be used to cover the legal bills of Do Kwon in Montenegro.

The bankruptcy court in Delaware will entertain the dispute on March 5 as investors wait to recover their losses. In 2022, Terra’s stablecoin lost its peg to the dollar resulting in widespread industry losses that played a role in the crypto bear cycle.

Both the United States and South Korea are looking to have Do Kwon extradited to face charges. However, a Montenegro judge ruled Do Kwon’s extradition in favor of the US, where his trial is set to begin later next month.

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