In a recent development, the United States Securities and Exchange Commission (SEC) has initiated legal action against Terraform Labs and its founder, Do Kwon, regarding the collapse of Terra in May 2022. The SEC alleges that Terraform Labs’ substantial spending on legal fees was an attempt to evade repaying creditors.
Allegations of misuse of funds
The SEC has raised concerns over Terraform Labs’ allocation of a significant sum, totaling $166 million, towards legal expenses, particularly the retainer payment to law firm Dentons. According to the SEC, this substantial amount could have reimbursed investors and creditors affected by Terra’s collapse.
The SEC further asserts that Terraform Labs’ decision to file for Chapter 11 bankruptcy protection has provided a shield behind which the company has conducted its defense, including paying legal fees.
Terraform Labs’ response and court proceedings
Terraform Labs has responded to the SEC’s allegations by seeking permission from the court to pay all necessary legal expenses essential for its defense against the SEC’s litigation. The company argues that these legal expenses are imperative to safeguard its ability to continue its operations smoothly.
Moreover, Terraform Labs dismisses the SEC’s objection as merely representing concerns from creditors, asserting the necessity of these legal expenditures to ensure the company’s continued viability.
Implications for business operations
The dispute between Terraform Labs and the SEC holds significant implications for the company’s ongoing operations. Terraform Labs emphasizes securing court authorization to cover legal expenses critical to its defense against the SEC’s legal action.
Failure to obtain approval for these expenditures could potentially disrupt Terraform Labs’ business activities, jeopardizing its ability to function effectively as a going concern.
