3AC liquidator claims $1.3 billion from Terraform Labs: Misrepresentation led to mistaken investment in Terra

Bloomberg reported that the liquidators of the defunct cryptocurrency hedge fund Three Arrows Capital 3AC have accused Terraform Labs of exaggerating and misleading the company about the stability of the tokens UST and LUNA in the Terra ecosystem, leading to investment losses and ultimately bankruptcy.

3AC Liquidators Sue Terraform Labs

Reports reveal that the 3AC joint liquidators, led by three creditors from Teneo Holding, have filed a $1.3 billion claim in the United States Federal Court this week regarding the bankruptcy case of Terraform Labs to compensate for the losses suffered by 3AC after the collapse of Terra due to attacks.

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False Statements Misled 3AC's Investment in Terra Ecosystem

The claim documents state that Teneo accuses Terraform Labs of misleading a Singapore hedge fund and 3AC regarding the stability of tokens in the Terra ecosystem, primarily involving Terra's algorithmic stablecoin TerraUSD UST and the token Luna LUNA pegged to UST.

The liquidators emphasize that Terraform Labs promoted its tokens through "artificially inflating asset prices":

These false statements and omitted risk warnings led to the collapse of 3AC's investment in the Terra ecosystem after UST decoupled, resulting in significant losses for various crypto companies including 3AC.

Additionally, they state, "Creditors demand the company compensate for the losses incurred by 3AC's purchase of UST and LUNA, as well as the complete loss of value in 3AC's other investments due to the collapse of LUNA and UST."

In June last year, 3AC liquidators had already sought $1.3 billion in damages from the company's founders Su Zhu and Kyle Davies; the former was arrested in Singapore in September last year, while the latter, who remains missing, continues to claim on social platforms that he has renounced his U.S. citizenship and is not subject to U.S. court jurisdiction.

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The Rise and Fall of 3AC

As one of the largest cryptocurrency hedge funds globally, 3AC was established in 2012, managing assets worth up to $18 billion at its peak; however, with the collapse of the Terra ecosystem in 2022, 3AC, unable to meet margin calls due to excessive leverage, suffered heavy losses and declared bankruptcy.

It is reported that the bankruptcy proceedings initially began in the British Virgin Islands, then expanded to Singapore and the United States, involving assets totaling $1.1 billion of the two founders and Davies' wife Kelly Chen, and were frozen by the British Virgin Islands court in December last year.

Translation by Arthur Hayes, Co-founder of BitMEX, Analyzes the Rise and Fall of 3AC, and the Lessons Learned from the Demise of Centralized Lending Companies