FTX Fights Back: Calls Three Arrows’ $1.5B Demand ‘Fiction’ Amid Creditor Tensions

Bankrupt crypto exchange FTX has fiercely contested a massive $1.53 billion claim by defunct hedge fund Three Arrows Capital (3AC), calling it “illogical” and a threat to the recovery hopes of its own legitimate creditors.

In court filing made on June 20 before a Delaware bankruptcy court, the legal team handling the case of FTX petitioned the judge to dismiss the demand by 3AC altogether. 

The filing stated that 3AC had lost around 3AC because of its own, allegedly reckless, trading habits and not as a result of any malpractice by FTX, such as excessive lending and borrowing funds, and then being unable to cover margin calls.

FTX’s $120M Credit Deal Under Scrutiny

The bone of contention is a credit facility worth 120 million dollars that FTX had provided to 3AC at the height of the market tumult prior to the crypto meltdown of mid-2022. Then, 3AC was heavily using positions within the sector, including on the FTX platform.

By the time the TerraUSD (UST) stablecoin crashed in June 2022, it was a catalyst to an entire market domino effect. In the case of FTX, the margin account that belonged to 3AC overstays on the platform violated the collateral conditions, yet FTX did not respond to the alerts related to the critical need to address the loss, and, instead, the hedge fund took out 18 million dollars worth of Ethereum, thus increasing the exigency.

FTX Justifies Urgent Liquidation of 3AC

FTX stated that it had to, out of necessity, liquidate the positions of 3AC, and they got back 82 million dollars which is going to serve to avoid an even greater hole in the financial situation of the estate. According to the lawyers:

“The accounts would’ve been $18 million underwater at FTX’s petition date had the liquidation not occurred. No action by FTX resulted in any loss of value, and thus the assertion that 3AC has a claim against FTX is a fiction.”

The estate also argued that 3AC has used what it referred to as an irrational and unrealistic starting premise, increasing its claim which had originally been pegged at US$120 million to US$1. 53 billion.

FTX Cites Flawed Legal Logic by 3AC

FTX supported its claims by submitting a testimony by the Steven P. Coverick, who is a managing director at the Alvarez and Marsal, and viewed the trades at hand as liquidable. Moreover, Britain Virgin Island King Counsel Stephen Atherton rejected the legal views of 3AC under the British Virgin Island law citing that it is principally flawed.

FTX attorneys have presented the case as a giant demand on the part of 3AC liquidators to recover losses in its own attempted wind-up undertaking and transfer the blame to the beleaguered bankruptcy estate of the exchange, which has yet to repay customers’ losses in the implosion in November 2022. The filing stated:

“[3AC seeks] to extract value from the Debtors’ estates at the expense of legitimate creditors in order to salvage their own failed liquidation proceedings. But FTX creditors should not and cannot serve as a backstop for 3AC’s failed trading strategy.”

FTX and 3AC Face Legal Roadblocks

The court battle brings to the fore the complexities of a series of intersecting bankruptcies and cross-claims that continue to play out in the cryptocurrency industry. FTX and the 3AC both went down with a bang during 2022, and both are still embroiled in lawsuits that are further holding up and prevent payouts to thousands of investors.

By the existing court schedule, 3AC has to file a formal response by July 11, and a non-evidentiary hearing will be held on August 12 in Delaware. Three Arrows capital legal representatives were not responding to requests to comment as of Saturday.

Conclusion

The emerging legal dispute between FTX and 3AC indicates the financial and legal complexity of the crypto meltdown of 2022. The decision will have major implications on creditor recoveries and potential precedent-setting impacts on how collapsed crypto companies resolve multi-billion-dollar disagreements in bankruptcy as court deadlines loom.

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Summary

FTX is seeking a bankruptcy judge in Delaware to dismiss a claim of $1.53 billion by failed hedge fund Three Arrows Capital (3AC), saying it was illogical and exaggerated. FTX had claimed in filings in June 20, that 3AC had run their losses as a result of their own excessive risk-taking and their inability to honor margin calls and not as a result of any actions by FTX.

The exchange reported that it had recovered $82 million in a required liquidation. Attorneys representing 3AC have until July 11 to respond, and a court hearing will take place on August 12.

FAQs

1. Why is FTX rejecting 3AC’s claim?

FTX says 3AC’s losses were self-inflicted, not FTX’s fault.

2. What caused the dispute?

3AC breached margin terms after TerraUSD’s collapse.

3. How much did FTX recover?

FTX recovered $82M by liquidating 3AC’s account.

4. What’s next in court?

3AC must respond by July 11; hearing is August 12.

Glossary Of Key Terms

FTX
Collapsed crypto exchange in bankruptcy since 2022.

Three Arrows Capital (3AC)
Failed crypto hedge fund claiming $1.53B from FTX.

Bankruptcy
Legal process to resolve debts for failed firms.

Credit Facility
Loan or credit line FTX gave 3AC $120M.

Margin Call
Request for more funds when collateral drops.

Collateral
Assets backing a loan 3AC breached requirements.

TerraUSD (UST)
Collapsed stablecoin that triggered market meltdown.

Alvarez & Marsal
Consulting firm analyzed and backed FTX’s actions.

Reference

restructuring.ra.kroll.com