The US Securities and Exchange Commission (SEC) had objected to the payment of retainer worth $166 million that Terraform Labs paid to its law firm Dentons.
The bankrupt crypto firm pushed back at the securities regulator’s objection in a court filing, referring to it as an example of government overreach, which it called ‘troubling’.
Terraform Labs’ argument
According to Terraform Labs, the SEC was only doing so to distract and disadvantage the company before the start of the trial.
The company said that the objections of the regulatory body should be overruled by the court because it said that they were misapplying the law and there were also factual misstatements.
It requested that its retainer to its law firm be approved. The objection of the SEC to the retainer payment was that Terraform Labs should not be allowed to hire Dentons.
In addition, the regulator also said that it should not be permitted to any litigation costs for its employees during the bankruptcy process.
As per the regulator, the Dentons Advance Payment Retainer worth $122 million was made within 90 days before it filed for bankruptcy.
Thus, it said that the money could have been used for repaying creditors of Terraform Labs, which created a potential conflict of interest between the companies.
The SEC’s response
The securities regulator has argued that Dentons should not be allowed to represent Terraform Labs unless it returns the remaining figure in the retaining account worth $81 million.
It has also asserted that the fees of the law firm should also be under the bankruptcy court’s oversight. But, Terraform Labs does not agree with the regulator.
The company has argued that paying expenses and fees that are needed for its defense against litigation is essential because it threatens its status as a going concern.
This was in reference to the upcoming civil enforcement action that the SEC has taken against the company, along with an investigation by a grand jury in the Southern District of New York.
The details
According to the crypto company’s lawyers, if the court does not overrule the objections of the SEC, it would become immensely difficult for Terraform Labs to mount its defense.
The lawyers argued that the company was being denied its basic right to defend itself from serious charges imposed by the government.
Last month, Terraform Labs made a voluntary Chapter 11 bankruptcy filing in Delaware. The crypto company is known for developing LUNA and also TerraUSD (UST) tokens.
The latter collapsed in 2022 after the algorithmic stablecoin UST lost its dollar peg and the downfall of the Terra ecosystem resulted in a contagion in the crypto industry.
This led to the collapse of several major crypto companies, including Three Arrows Capital, Celsius, and eventually the FTX crypto exchange.
Do Kwon, the founder of Terraform Labs, is currently serving a jail sentence for using a forged passport in Montenegro.
There have been several attempts to extradite him to the United States, as a civil fraud suit has been filed against him by the SEC.