A U.S. bankruptcy court has granted liquidators of defunct hedge fund Three Arrows Capital (3AC) permission to expand their claim against the bankrupt cryptocurrency exchange FTX to $1.53 billion. The ruling, issued by Judge John T. Dorsey of the U.S. Bankruptcy Court for the District of Delaware, comes after 3AC’s liquidators argued that delays in obtaining critical financial records from FTX hindered their ability to file a more comprehensive claim earlier.
“On June 3, 2024, counsel for 3AC reached out to Debtor’s counsel again with new requests, but Debtor’s counsel stopped responding.17 On July 2, 2024, after a month of silence, 3AC’s counsel emailed FTX’s counsel attaching proposed discovery requests in advance of filing a motion for discovery pursuant to Bankruptcy Rule 2004,” the court document stated
FTX’s debtors, led by CEO John Ray III, opposed the move, contending that the expanded claim introduced new legal theories and significantly increased the original amount. However, the court determined that 3AC had provided sufficient notice and that FTX’s own lack of transparency contributed to the delay in filing.
The approval marks a major escalation in the legal fight between the two collapsed firms, both of which played central roles in the crypto market turmoil of 2022. With billions of dollars in claims already filed against FTX, this latest ruling adds further complexity to the ongoing bankruptcy proceedings.
The FTX-3AC Connection and Allegations of Wrongdoing
Three Arrows Capital, once one of the largest crypto hedge funds with over $3 billion in assets, collapsed in June 2022 after a series of failed leveraged bets. The firm, founded by Kyle Davies and Su Zhu, suffered major losses due to its exposure to TerraUSD and Luna, which triggered a chain reaction across the industry.
However, 3AC’s liquidators now argue that FTX played a key role in accelerating their downfall. According to court documents, 3AC had $1.53 billion in assets on FTX as of June 12, 2022. Within the next two days, FTX liquidated those assets to cover a $1.3 billion debt owed to the exchange. 3AC alleges that FTX’s actions, including preferential treatment of its sister trading firm Alameda Research and possible market manipulation, unfairly pushed it into insolvency.
The expanded claim includes allegations of breach of contract, unjust enrichment, and breach of fiduciary duty against FTX. 3AC’s liquidators argue that had FTX not engaged in these activities, the hedge fund might have had a chance to restructure rather than collapse outright.
FTX’s Bankruptcy Proceedings and the Wider Crypto Fallout
FTX’s own bankruptcy process has been one of the most contentious in crypto history. Following its spectacular collapse in November 2022, the exchange has been sorting through thousands of creditor claims, with multiple parties vying for what remains of its assets.
The expanded claim by 3AC could further complicate the distribution of funds to FTX creditors. With firms such as Voyager Digital, BlockFi, and Celsius Network also seeking compensation, the growing list of claimants continues to slow down the resolution process.
Adding to the complexity, FTX founder Sam Bankman-Fried, was sentenced to 25 years in prison for orchestrating multiple fraudulent schemes, including wire fraud, conspiracy to commit wire fraud, and securities fraud, among others. His highly publicized trial revealed the extent of financial mismanagement at FTX, which could impact how courts handle compensation claims from affected firms.
Quick Facts:
- A U.S. bankruptcy court approved 3AC’s request to expand its claim against FTX to $1.53 billion, citing delays caused by FTX’s lack of transparency.
- 3AC’s liquidators argue that FTX’s market manipulation and unfair liquidation practices contributed to its collapse.
- The expanded claim could further complicate FTX’s bankruptcy proceedings, as other creditors also seek compensation.
