SEC accuses Terraform Labs of diverting $166 million to legal team ahead of court decisions

The US Securities and Exchange Commission (SEC) accused Terraform Labs of transferring around $166 million to Dentons U.S. LLC, a law firm, under the guise of an Advance Retainer Payment. The SEC views this move as an effort to divert assets from the company ahead of any court decision.

While the SEC acknowledges Dentons as a legal counsel and recognizes the validity of covering litigation expenses, the regulator described the scale of the funds involved in the matter as “extraordinary.”

The SEC claimed it took this action to safeguard the assets on behalf of Terraform Lab’s victims due to insufficient disclosures and non-compliance with bankruptcy regulations.

‘Suspicious transfers’

The financial regulator continued that Terraform Labs transferred $122 million to Dentons within the 90-day window preceding its bankruptcy filing—a timing the SEC deems suspicious.

The commission alleged that these funds were funneled into an obscure fund for the debtor’s legal team to serve as a “war chest” to support its defense against the SEC to the detriment of its creditors.

The SEC further argued:

“The assets transferred may be proceeds of the conduct the SEC alleged, and the District Court already found, violated the law.”

While a substantial portion of the payment has been utilized to cover legal expenses, an outstanding balance of $81 million remains with Dentons. Consequently, the SEC has demanded the reimbursement of this remaining sum to Terraform Labs’ account before Dentons can represent them further.

In addition to seeking repayment, the SEC has urged the appointment of a fee examiner to scrutinize the application and associated payments.

Dentons also represents Do Kwon.

The filing disclosed that Dentons also represents Terraform’s former CEO, Do Kwon, who is currently embroiled in legal troubles across several borders.

Kwon is currently held in Montenegro, where he served a four-month prison sentence for traveling with forged documents. Last week, a High Court approved his extradition to the US over his home country, South Korea. However, his extradition appears unlikely before his SEC trials begin due to legal complications.

Kwon’s issues with the SEC stem from allegations of misconduct surrounding the May 2022 Terra/Luna collapse. The SEC has accused Kwon and Terraform of misleading investors regarding the stability of the failed TerraUSD algorithmic stablecoin.