The US Securities and Exchange Commission (SEC) has accused Terraform Labs of transferring approximately $166 million to Dentons U.S. LLC, a law firm, under the guise of an Advance Retainer Payment, purportedly in an attempt to divert assets from the company ahead of any court decision.

While acknowledging Dentons as a legal counsel and recognizing the validity of covering litigation expenses, the SEC expressed concern about the substantial amount involved, describing it as "extraordinary." The regulator views this move as an effort to protect the assets on behalf of Terraform Lab’s victims due to insufficient disclosures and non-compliance with bankruptcy regulations.

The SEC raised concerns about what it termed "suspicious transfers," noting that Terraform Labs transferred $122 million to Dentons within the 90-day window preceding its bankruptcy filing—a timing the SEC finds suspicious. The commission alleges that these funds were channeled into an obscure fund for the debtor’s legal team to serve as a "war chest" to support its defense against the SEC to the detriment of its creditors.

Additionally, while a significant portion of the payment has been used to cover legal expenses, an outstanding balance of $81 million remains with Dentons. Consequently, the SEC has demanded the reimbursement of this remaining sum to Terraform Labs’ account before Dentons can represent them further. Moreover, the SEC has requested the appointment of a fee examiner to scrutinize the application and associated payments.

The filing also revealed that Dentons represents Terraform’s former CEO, Do Kwon, who faces legal challenges across several jurisdictions. Kwon, currently detained in Montenegro, faces extradition to the US over allegations of misconduct related to the May 2022 Terra/Luna collapse. The SEC has accused Kwon and Terraform of misleading investors regarding the stability of the failed TerraUSD algorithmic stablecoin.