Terraform can retain its law firm despite SEC objections of ‘slush fund,’ court rules

Terraform Labs and the SEC are expected to head to trial later this month

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Terraform Labs and Adobe Stock modified by Blockworks

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Terraform Labs can retain its lawyers in its bankruptcy proceedings, a judge ruled Tuesday.

The ruling comes after the Securities and Exchange Commission challenged the bankrupt company’s retainer of $166 million for the lawyers. 

The bankruptcy court found, thanks to two declarations in support of the company’s move, that the law firm “does not represent or hold any interest adverse to the debtor.”

Additionally, the law firm agreed to return $48 million — of the amount pre-paid for the firm’s work on the case — to Terraform

Read more: Terraform faces ‘significant liability’ after SEC trial

The agency previously argued that “the timing and enormous amount of these transfers, given the ongoing litigation with the SEC, warrant proceeding with caution to protect Debtor assets — which may ultimately belong to the investor victims the SEC alleges were defrauded by the debtor.”

Terraform filed to retain Dentons as its counsel in February.

The SEC argued on Feb. 27 that the timing was “suspicious” due to its litigation against the now-bankrupt company. 

The SEC and Terraform have faced off in court ahead of an upcoming trial, arguing for and against a partial ruling on the securities sales alleged by the SEC. Judge Jed Rakoff sided with the regulatory agency, ruling that UST, LUNA, wLUNA and MIR “are securities because they are investment contracts.”

The regulatory agency called out the loss in its pushback against the Dentons retainer, saying that $122 million was transferred into an “opaque slush fund” for its lawyers before it filed for bankruptcy. 

A trial in the SEC’s case against Terraform Labs and its former CEO Do Kwon is set to take place later this month. The agency alleged that the two offered and sold cryptocurrencies that the SEC believes to be securities, as well as “orchestrating a multi-billion dollar crypto asset securities fraud” concerning its algorithmic stablecoin TerraUSD.

The stablecoin collapsed in the spring of 2022, just months before the FTX collapse. It wiped billions from the crypto market at the time, and the ripple effects led to the bankruptcies of Three Arrows Capital, Celsius and Voyager. 

Terraform Labs filed for bankruptcy earlier this year, calling the move a “strategic step” that would “enable it to continue its operations and support for the Terra community and ecosystem.”

It also claimed that the bankruptcy would allow the company to navigate its “legal proceedings” in both Singapore and the US.


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