In a recent court filing, bankrupt cryptocurrency firm Terraform Labs has strongly criticized the US Securities and Exchange Commission (SEC) for its objection to a $166 million retainer paid to law firm Dentons.

The firm argues that the SEC’s objection represents a troubling example of “government overreach” and aims to ” disadvantage ” and distract them just before the upcoming trial.

In the filing, dated Monday, March 4, Terraform Labs contends that if it hadn’t filed for Chapter 11 bankruptcy protection, the SEC would have no authority or insight into the company’s defense strategy or its decision to allocate funds for legal representation. 

However, the company claims that by taking advantage of the bankruptcy process, the SEC is allegedly using the situation to “sabotage” Terraform Labs’ defense in the SEC’s enforcement action.

The court filing by Terraform Labs further accuses the SEC of engaging in “damaging actions” and “questionable behavior” in similar enforcement actions, which are detailed in the firm’s reply to the SEC’s objection. 

The company asserts that the SEC’s objection continues an “unprincipled strategy” to gain a litigation advantage in a non-bankruptcy proceeding. Terraform Labs urges the court to reject the SEC’s attempt to use the Chapter 11 process “for its own advantage” and to protect Terraform Labs’ right to defend itself in government litigation and investigations.

In addition, the company claims that the SEC’s objection raises concerns about the “lack of transparency” regarding the allocation of funds and argues that the proposed litigation expenses do not benefit the estate and could harm it.

The court filing disputes this claim, stating that the SEC’s objections “misrepresent” the facts. Terraform Labs clarifies that the maximum amount sought in the motion is $6,297,754.31, a fraction of the amount claimed by the SEC.

The company further argues that the SEC’s objections fail to outweigh the evidence presented by its lead trial counsel, Mr. Califano, who attests to the necessity of the payments for Terraform Labs’ defense in the SEC Enforcement Action and compliance with the Department of Justice (DOJ) Investigation. It emphasizes that hindering these payments would impede their defense and “unjustly” advantage the SEC.

Terraform Labs asserts that it has exercised its business judgment in seeking to make these payments. They are essential for minimizing the SEC’s claim against the estate, maintaining employee morale, and retaining key personnel. 

The court filing argues that the payment of legal fees is justified under Section 363(b) of the Bankruptcy Code and refutes the SEC’s assertion that the payment of fees to Terra co-founder Do Kwon’s Montenegrin counsel, the Rodic Law Firm, is inappropriate due to Do Kwon’s prior criminal conviction.

Overall, Terraform Labs urges the court to recognize its exercise of business judgment in seeking to pay the disputed expenses and requests the court to overrule the objections raised by the SEC and the US Trustee. 

The Company emphasizes that its evidentiary basis for the requested relief is “robust” and supported by its lead trial counsel, Mr. Califano, who the Company believes is best positioned to determine the necessity of the payments for Terraform Labs’ defense.

As the legal battle between Terraform Labs and the SEC intensifies, the court’s decision on the matter will have significant implications for the company’s future and potentially set a precedent for how government agencies can influence bankrupt firms’ legal defense strategies.

Featured image from Shutterstock, chart from TradingView.com

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