According to a ruling by the US Bankruptcy Court, liquidators representing Three Arrows Capital are now free to expand their claim against FTX to $1.5 Billion.
The Court rejected FTX’s debtors’ objections on unfairness, citing the crypto exchange’s lack of cooperation. It then ruled in favor of the Three Arrows liquidators, stating that the debtors themselves self-inflicted the delay.
Giving the ruling Thursday, US District of Delaware Bankruptcy Court Judge John T. Dorsey observed that 3AC’s liquidators had given sufficient notice of their claim against FTX and were hampered in their investigation by FTX’s failure to share relevant records promptly. Judge Dorsey wrote in his decision:
“The evidence suggests that the Debtors themselves largely caused the delay in filing the Amended Proof of Claim.”
FTX Woes are Self-Inflicted
In the meantime, several FTX debtors, including CEO John Ray III, objected to the amendment, claiming that the introduction of amended legal theories increased the size of the claim against FTX significantly. Nonetheless, the Court ruled that the original filing by Three Arrows Capital had out the exchange “on notice of the possibility of the later asserted claims,” dismissing the debtors’ objections. Dorsey said:
“The evidence also suggests that the Liquidators were diligent in attempting to obtain the information and that despite having the complete information in their possession, the Debtors repeatedly delayed giving it to them.”
From $120M to $1.3B
Liquidators of the defunct crypto hedge fund Three Arrows Capital (3AC) went to Court in November 2024 seeking to amend their claim against FTX, increasing it from $120 million to $1.53 billion. According to the liquidators, FTX liquidated their assets on the platform at least two weeks before the hedge fund collapsed to settle a $1.33 billion debt. The hedge fund claimed the transactions that caused harm to Three Arrows Capital were avoidable and unfair.
Liquidators Allowed to Freeze FTX Assets
3AC claimed that the liquidations should be invalidated, claiming that FTX undervalued the transactions, breaching trust and contract. The bankrupt hedge fund also alleged that FTX delayed providing necessary information, forcing 3AC to parse raw data to calculate losses. As a result, Three Arrows Capital claimed it could only confirm the liquidated amount in August.
The ruling in favor of Three Arrows Capital comes several months after liquidators were granted the go-ahead to freeze over $1.4 billion worth of assets tied to its co-founders. The order issued in December 2023 by a British Virgin Islands court blocked Zhu, Davies, and Davies’ wife, Kelly Chen, from accessing funds during the court proceedings. Liquidators wanted the founders held accountable for the aggravated Three Arrow Capital financial woes.
Conclusion
Two years after the defunct exchange filed for bankruptcy, the number of claims against FTX continues to increase as it intensifies its recovery efforts. FTX has filed several such cases against Binance, SkyBridge Capital, its founder Anthony Scaramucci, and the jailed former CEO Sam Bankman-Fried. Only time will tell how the judgment favoring Three Arrows Capital will complicate FTX’s efforts to clean itself up.
Frequently Asked Questions (FAQs)
What are the implications of the ruling against FTX?
The outcome of the case against FTX raises some weighty implications for how future crypto bankruptcy cases are managed, especially regarding jurisdiction.
What’s the big deal about the outcome of the case?
The twist is that the Judge has allowed Three Arrows Capital to expand their claim against the FTX from $120 million to a jaw-dropping $1.53 billion.
What should crypto operators learn from this case?
Accurate asset valuation and reporting cannot be overemphasized, and misreporting can breach regulatory duties and interfere with effective risk management.
What does the future of crypto regulation look like in this case?
The outcome of the 3AC case will likely be a cornerstone for new crypto regulations in the US and abroad.
Appendix: Glossary of Key Terms
Bankruptcy: A legal proceeding initiated when a person or business cannot repay outstanding debts or obligations.
Hedge Fund: A type of company that invests exclusively in digital assets to generate revenue
Liquidation: Liquidation traditionally refers to the act of conversing assets into cash
References
