The defunct crypto hedge fund, Three Arrows Capital (3AC), has taken legal action against TerraForm Labs, a bankrupt digital assets company co-founded by Do Kwon, in an attempt to recover funds for its creditors. The liquidators of 3AC are alleging that TerraForm Labs manipulated the market for Luna and TerraUSD, resulting in artificially inflated prices for these tokens.
In January 2022, 3AC acquired $190 million worth of Luna as part of a broader $1 billion deal, which included investments from other firms. However, a massive sell-off of TerraUSD just a few months later triggered a sharp decline in both TerraUSD and Luna, causing substantial losses for 3AC. By the end of April 2022, 3AC’s Luna holdings were valued at approximately $462 million, but by May 14, that value had plummeted to just over $2,700. Simultaneously, the net value of 3AC’s other digital assets dropped by about $858 million.
TerraForm Labs filed for Chapter 11 bankruptcy in January and is currently in the process of liquidation after being found liable for fraud earlier this year. The liquidators appointed by a British Virgin Islands court from the consulting firm Teneo are pursuing claims against TerraForm Labs, as well as 3AC’s founders, Su Zhu and Kyle Davies. The outcome of the legal action remains uncertain, and the amount of money that can be recovered is still unknown.
The downfall of Three Arrows Capital (3AC) following the collapse of LUNA has raised questions about the integrity and stability of the crypto hedge fund industry. The arrest of TerraForm Labs’ co-founder Do Kwon in Montenegro last year, as well as the legal troubles faced by Su Zhu, further highlight the risks and legal challenges associated with investing in digital assets. The ongoing liquidation process and lawsuits serve as a cautionary tale for investors in the crypto space, emphasizing the importance of due diligence and risk management.
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