Court approves Terraforms Labs’ request to hire Dentons despite regulatory concerns

adminMarch 14, 2024

The U.S. Bankruptcy Court granted Terraform Labs’ request to retain law firm Dentons despite concerns raised by the company’s creditors and the SEC.

The approval follows Dentons’ promise to return $48 million to Terraform, a significant portion of the retainer fees it initially paid the company for legal services, and marks a strategic win for the beleaguered blockchain company amid financial turmoil. .

Judge Brendan Shannon, who presided over the hearing, emphasized the importance of Terraform Labs’ legal defense spending and said it was a wise allocation of the company’s limited financial resources.

slush fund concerns

Dentons’ involvement previously sparked controversy among various stakeholders, including Terraform’s creditors and regulators. This was due to concerns about significant upfront payments totaling $166 million to law firms from the start of 2023.

Critics argued that such payments diverted critical resources away from creditors and bypassed bankruptcy court oversight.

To quell this opposition, Dentons agreed to wire $48 million back to Terraform and agreed to subject all future legal services, especially those related to SEC litigation and potential appeals, to strict scrutiny by the bankruptcy court.

The agreement aims to balance Terraform’s requirements for high-quality legal representation with the need to preserve its dwindling financial resources to repay creditors and sustain its operations.

Cooperation with Attorney Kwon

Despite the overarching challenge of navigating bankruptcy and legal defense, Terraform had made great progress in resolving and resolving most of the objections to its legal expenditures prior to the court’s recent ruling.

However, the U.S. Trustee’s Office raised a separate issue with a law firm representing Montenegro’s Terra founder Dodo Kwon regarding the company’s intention to repay approximately $733,000.

The company’s legal team argued that cooperation with Kwon’s Montenegrin lawyers was essential to access critical information for its defense strategy against the SEC.

Judge Shannon upheld this claim and dismissed the US trustee’s concerns, finding that a financial arrangement with law firm Rodic was appropriate.

Terraform Labs’ legal entanglement dates back to a federal court ruling last December. The ruling ruled that the company and its founder violated U.S. securities laws by failing to register the two digital currencies.

The collapse of these tokens in 2022 had a catastrophic impact on the cryptocurrency market, resulting in losses of $40 billion. The SEC’s allegations against Terraform highlight the seriousness of the allegations and potential financial liabilities that far exceed the company’s available assets.

The company filed for Chapter 11 bankruptcy in January. Mr. Kwon was initially expected to attend the trial. However, recent developments indicate that he will most likely be extradited to his native South Korea after almost a year of legal proceedings.