Terraform Labs has pushed back against the U.S. Securities and Exchange Commission's (SEC) objection to a $166 million retainer paid to law firm Dentons.

In a court filing, the bankrupt crypto firm called the SEC's objection a "troubling example of government overreach," arguing that its motive for doing so was "to disadvantage and distract and adversary on the eve of trial."

Terraform Labs argued that the court should overrule the SEC's objections, which it described as "replete with misapplications of law and factual misstatements," and approve its retainer to the legal firm.

The SEC had objected to Terraform Labs' "staggering" $166 million retainer payment to Dentons, and had argued that the firm should not be allowed to hire Dentons, nor pay litigation costs for employees during its bankruptcy.

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The regulator argued that a $122 million payment to the Dentons Advance Payment Retainer had been made within a 90-day period prior to its bankruptcy filing, and that the money could be used to repay Terraform Labs' creditors—creating a potential conflict of interest between the firms.

It argues that Dentons should be blocked from representing Terraform Labs unless it returns $81 million remaining in the retainer account, and its fees should be subject to oversight from the bankruptcy court.

In its Monday filing, Terraform Labs argues that it needs to pay fees and expenses that are necessary to defend against litigation "that threatens its ability to operate as a going concern," namely the SEC's upcoming civil enforcement action and a grand jury investigation in the Southern District of New York (SDNY).

Lawyers for the crypto firm claimed that its ability to mount a defense to these actions would be "significantly hindered" if the court fails to overrule the SEC's objections, arguing that it was being denied "the basic due process of being able to defend itself fully from serious government charges."

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Terraform Labs filed for voluntary Chapter 11 bankruptcy in Delaware last month. The crypto firm developed the LUNA and TerraUSD (UST) cryptocurrencies, which collapsed in 2022 after UST, an algorithmic stablecoin, lost its dollar peg. The implosion of Terra's ecosystem sparked contagion in the crypto industry that ultimately resulted in the collapse of firms including FTX and Three Arrows Capital.

The firm's founder, Do Kwon, is currently serving a jail sentence in Montenegro for using a forged passport. Upon his release, he faces extradition to the U.S., where the SEC has brought a civil fraud suit against him. Do Kwon also faces criminal charges from the SDNY attorney's office.

Edited by Stacy Elliott.

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