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U.S. Judge Brendan Shannon has authorized the bankrupt cryptocurrency firm Terraform Labs to engage Dentons for its legal counsel, as reported by Reuters.
Shannon approved the engagement during a bankruptcy court session in Wilmington, Delaware, after determining that Terraform’s legal expenditures constituted a “necessary appropriate” allocation of the company’s strained financial resources.
Since the start of 2023, Terraform Labs has disbursed a total of $166 million in legal fees to Dentons, a decision that faced opposition from the SEC and Terraform’s creditors, who contended that it diverted funds away from them.
To address the concerns of dissenters, Dentons consented to return $48 million to Terraform while agreeing to subject its future legal activities to increased oversight by the bankruptcy court.
Court filings indicate that Dentons will retain a portion of the remaining retainer to cover costs associated with a trial that will ascertain any penalties Terraform may incur due to the SEC’s securities fraud lawsuit against it.
Terraform’s Case Is Challenging For Dentons
Not only are Dentons attorneys receiving substantial fees for representing Terraform, but their efforts will also be examined in other ongoing legal disputes involving cryptocurrency firms and regulators.
The SEC is currently pursuing several other companies for alleged securities violations, including Ripple, Coinbase, and Binance.
In December, a federal judge determined that Terraform Labs and its founder Do Kwon breached U.S. securities laws by failing to register its primary operations—the now-defunct UST and LUNA (LUNC) cryptocurrencies—as securities offerings.
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LUNC is the rebranded version of the original LUNA. LUNA V1 was crucial in maintaining the peg of Terra’s flagship cryptocurrency, the algorithmic stablecoin UST, to the U.S. dollar.
At that time, many believed UST was too innovative to fail.
A burn/mint mechanism upheld UST’s $1 value. To create one UST token, one had to burn $1 worth of LUNA, and vice versa.
This mechanism collapsed in May 2022 when a mass withdrawal from UST triggered LUNA V1 to spiral into hyperinflation.
Two months prior, the community had approved a proposal that reduced interest rates on UST’s primary use: locking it in Anchor to earn yield.
With its primary use eliminated, users began to exit UST en masse, minting trillions of LUNA in the process. During the bank run, LUNA’s token supply surged from three-quarters of a billion on May 5 to an astonishing 7 trillion a week later, where it currently remains.
The resulting devastation had (and arguably continues to have) extensive implications for the entire industry. It triggered a recession from which we have only recently begun to recover.
Crypto Winter saw numerous companies linked to Terra’s ecosystem file for bankruptcy, including lenders like Celsius and Voyager, exchanges such as Vauld and FTX, and hedge fund Three Arrows Capital (3AC).
The SEC asserts that the collapse of Terraform’s ecosystem resulted in $40 billion in damages.
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