US Judge Brendan Shannon has granted bankrupt crypto company Terraform Labs permission to hire Dentons for its legal representation, according to a report by Reuters.
Shannon approved the hiring at a bankruptcy court hearing in Wilmington, Delaware after he deemed Terraform’s legal spending was a “necessary appropriate” use of the company’s beleaguered financial resources.
Since the beginning of 2023, Terraform Labs has paid Dentons a total of $166 million in legal fees, a move which was previously opposed by the SEC and by Terraform’s creditors, who argued that it effectively funnelled money away from them.
To placate opponents, Dentons agreed to return $48 million to Terraform while submitting its future legal work to greater oversight by the bankruptcy court.
Court documents suggest Dentons will keep part of the remaining retainer to fund expenses for a trial that will determine any penalties Terraform must pay as a result of the SEC’s securities fraud suit against it.
Terraform’s Case Is Tough For Dentons
Not only are Dentons lawyers receiving eye-popping sums for defending Terraform, their work will also be scrutinized in other ongoing lawsuits between crypto companies and regulators.
The SEC alone is currently several other companies for alleged securities frauds, including Ripple, Coinbase, and Binance.
In December, a federal Judge ruled that Terraform Labs and its founder Do Kwon violated U.S. securities laws by failing to register its main businesses—the now-collapsed UST and LUNA (LUNC) cryptocurrencies—as securities offerings.
LUNC is the renamed version of the original LUNA. LUNA V1 played an integral role in pegging Terra’s flagship cryptocurrency, the so-called algorithmic stablecoin UST, to the US dollar.
At the time, many thought UST too clever to fail.
A burn/mint mechanism maintained UST’s $1 value. To create one UST token, you had to burn $1 LUNA, and vice versa.
The mechanism failed in May 2022 when a mass exodus from UST caused LUNA V1 to enter a hyperinflationary spiral.
Two months earlier, the community had passed a proposal that lowered interest rates on UST’s number one use: locking it up in Anchor to generate yield.
With its number one use gone, people began to exit UST en mass, minting trillions of LUNA in the process. During the bank run, LUNA’s token supply went from three quarters of a billion on May 5 to a staggering 7 trillion a week later, where is currently sits.
The ensuing carnage had (and arguably still has) wide repercussions for the entire industry. It set off a recession we’ve only just come out of.
Crypto Winter saw many companies exposed to Terra’s ecosystem filing for bankruptcy, including lenders like Celsius, and Voyage, exchanges like Vauld and FTX, and hedge fund Three Arrows Capital (3AC).
The SEC claims Terraform’s ecosystem wipeout caused $40 billion in damages.