Two weeks before the hedge fund collapsed in 2022, new legal papers show that FTX surreptitiously sold $1.53 billion worth of Three Arrow Capital (3AC) assets. This disclosure calls into question earlier accounts that 3AC’s collapse resulted from just market conditions.
Originally a major player in the market for crypto hedge funds, 3AC controlled assets worth more than $10 billion before its quick fall in mid-2022. Before the May 2022 market collapse, the company had acquired significant leveraged stakes spread over several institutions; the value of Bitcoin dropped to $16,000. Recent data, however, imply that FTX’s liquidation of 3AC’s assets was a major factor hastening its collapse.
In a fresh lawsuit, 3AC has asked a judge to accept an increase in its claim against FTX from the already mentioned $120 million to a startling $1.53 billion. Sources engaged in the matter say 3AC was not aware of these liquidations since FTX’s own bankruptcy issues caused uncertainty. A court decided that 3AC behaved in excellent faith, allowing the hedge fund to pursue its whole claim in the bankruptcy process of FTX.
Concurrent with this, on December 21, 2023, a court of the British Virgin Islands froze assets valued at $1.14 billion belonging to 3AC co-founders Kyle Davies and Su Zhu. Notwithstanding this, estimates indicate that after the collapse of the hedge fund, 3AC creditors still owe about $3.3 billion.
Legal experts claim that, although the $1.53 billion figure is considerable, it might not have been sufficient to save 3AC from collapsing. One analyst said 3AC would not have been able to pay its debt even with these funds.
Adding still another level of intricacy, a U.S. bankruptcy court has lately allowed 3AC’s request to enlarge its claim against FTX. Rejecting claims from FTX’s debtors, the verdict lets 3AC liquidators pursue a bigger recovery from the bankruptcy estate. The court observed that FTX’s failure to promptly produce required records caused most delays in claiming filings.
Under CEO John Ray III, FTX’s leadership rejected the claim expansion, claiming it brought fresh legal challenges and greatly raised the possible liabilities. The court decided, however, that 3AC’s original submission had already shown the likelihood of more claims, therefore negating FTX’s concerns.
Given these developments, Binance co-founder and former CEO Changpeng Zhao has openly questioned if FTX participated in the TerraUSD (UST) and Luna (LUNA) collapses in May 2022, thus feeding conjecture about the exchange’s influence in prior market turbulence.
The continuous FTX-3AC conflict is changing the terrain of crypto bankruptcy as court battles get more intense and billions of dollars at risk entwine creditors and investors eager for solutions.
