Via a series of highly-leveraged bullish directional bets with borrowed money from major crypto institutions, 3AC became insolvent amidst the ongoing cryptocurrency bear market. Its founders allegedly fled and defaulted on loan payments that were left behind, leading to a major contagion among centralized finance firms who lent money to 3AC. Both of 3AC's co-founders, Su Zhu and Kyle Davies, could not be located after the fund's blowup. Ironically, Su Zhu is allegedly claiming $5 million from 3AC, while Chen Kaili Kelly, wife of Kyle Davies, is allegedly claiming $66 million. However, such claims are reportedly quasi-equity and subordinate to the distribution of leftover assets, if any, to creditors.
[Sun, Z. 3AC allegedly liable for $2.8B in creditor claims. (Accessed July 19, 2022)].
It should be remembered that 3AC filed a Chapter 15 Bankruptcy Petition in the U.S. Bankruptcy Court for the Southern District of New York earlier this month. [A copy of this Bankruptcy Petition may be found by clicking here]. Although purportedly confidential, some information has been leaked by a creditor, Soldman Gachs, as to the topics addressed in a Creditors Meeting held on July 18, 2022, via Twitter.
The content of this leaked disclosure is summarized as follows:
The meeting covered various topics, and the liquidators agreed not to seek an alternative liquidator. Teneo remains the liquidator, and Soldman Gachs expressed confidence and trust in them. The liquidator meeting also saw them vote to have a creditor committee, which includes Digital Currency Group, Voyager Digital, Blockchain Access UK Ltd, Matrix Port Technologies, and CoinList Lend.
Those five entities are responsible for making about 80% of the current level of claims, the total of which Soldman Gachs said currently stands at $2.8 billion. However, he also noted that many have not made or quantified claims, which means that figure could be much higher.
Three Arrows Capital’s assets consist of bank account balances, crypto holdings, underlying equities in projects, and NFTs. Co-founder Su Zhu himself is claiming $5 million, while ThreeAC Limited is claiming $25m, and Chen Kaili Kelly (wife of Kyle Davies) is claiming $66m.
[Owen, A. Three Arrows Capital Claims Near $2.8B as Liquidation Process Intensifies. (Accessed July 19, 2022)].
The full contents of Gachs series of tweets may be found by clicking here. It is interesting to note the reasoning behind Gachs decision to disclose this information. In his own words:
The liquidator asked that the contents of the meeting not be shared with the public, but this is of paramount public interest and the parties that have been affected have a responsibility to be open and transparent with their users, shareholders, lenders etc. Having said that, going forward, I will be sensitive with what I share regarding fellow creditors, but I have no interest in holding back when it comes to Kyle, Su, and 3AC.
[Gachs, S. Tweet]
The fall of the crypto hedge fund has been the talk of the crypto world ever since it happened, and the number of twists and turns have only continued to stoke concerns. The bankruptcy filing even stated that the location of the co-founders was unknown. Zhu broke his silence after a month, saying that the liquidators were simply baiting. He said that the company has been cooperating, though the tweet thread said otherwise. In any case, the crypto world will keep a close eye on the developments. Both retail investors and companies will learn from this incident and seek to prevent any similar occurrences in the future.
[Nambiampurath, R. Three Arrows Capital Claims Near $2.8B as Liquidation Process Intensifies. (Accessed July 19, 2022)].
Take note that the sum of 2.8 Billion owed to creditors may not be final and in fact may increase "as some have not yet made or quantified their claims" [Id].