Three Arrows Capital Liquidators Seek $1.3 Billion from Bankrupt Hedge Fund’s Founders, Alleging Mismanagement and Risky Debt

Three Arrows Capital (3AC), a bankrupt crypto hedge fund, is facing legal action as its liquidators seek $1.3 billion from the fund’s founders. The liquidators, who are partners at consulting firm Teneo, claim that the founders took on additional debt in the months leading up to the fund’s collapse, despite its already insolvent status. This information was reported by Bloomberg on Tuesday.

According to a person familiar with the matter, the liquidators discussed these allegations with Three Arrows creditors. They are now aiming to recover the funds in a court in the British Virgin Islands. The fund experienced significant losses as a result of the collapse of the Terra ecosystem, which began in May 2022. Despite these losses, founders Su Zhu and Kyle Davies decided to take on more leverage.

The collapse of 3AC played a pivotal role in last year’s crypto winter, leading to the subsequent failures of other crypto firms that had exposure to the hedge fund. Among these firms were Voyager Digital, Celsius Network, and Genesis Asia Pacific. All three companies subsequently filed for bankruptcy protection. It is worth noting that Genesis Asia Pacific, like CoinDesk, is a part of the Digital Currency Group.

A spokesperson from Teneo confirmed the accuracy of the Bloomberg report to CoinDesk but declined to provide further comments on the matter.

The actions taken by the liquidators and the allegations against the founders of Three Arrows Capital highlight the potential risks and challenges within the crypto industry. Investors should be aware of the potential for insolvency and mismanagement, even in reputable hedge funds. The collapse of 3AC serves as a cautionary tale for those involved in the crypto community.

The outcome of the legal proceedings and the recovery of the $1.3 billion sought by the liquidators will be closely watched by industry participants and investors. This case may set precedents for future bankruptcy cases involving crypto hedge funds and could have broader implications for the regulation and oversight of the crypto industry.

As the industry continues to mature, it is increasingly important for investors and regulators to closely monitor the financial health and practices of crypto funds. This will help mitigate risks and ensure the long-term sustainability and stability of the industry.