Liquidators for the defunct cryptocurrency hedge fund Three Arrows Capital are seeking at least $1.3bn from TerraForm Labs, the bankrupt digital assets firm co-founded by Do Kwon over losses incurred from the 2022 collapse of TerraForm’s TerraUSD and Luna tokens, according to a report by Bloomberg.
The report cites court filings as revealing that the liquidators allege that TerraForm Labs manipulated the market for Luna and TerraUSD, artificially inflating their prices before their value fell dramatically. This crash not only obliterated Three Arrows’ investment in these tokens but also caused significant losses across its other holdings.
Three Arrows Capital, once a leading name in the crypto hedge fund space, faced collapse shortly after the TerraUSD and Luna tokens crashed, alongside several other major crypto entities. The British Virgin Islands court appointed liquidators from Teneo, a consulting and advisory firm, to recover funds from the hedge fund’s founders, Su Zhu and Kyle Davies, as well as other parties to repay creditors.
In a related development, a US jury found TerraForm Labs and Kwon liable for fraud in connection with the Luna collapse earlier this year.
The liquidators reported that Three Arrows Capital purchased $190m worth of Luna in January 2022 as part of a broader $1bn deal involving other investment firms. However, a massive sell-off of TerraUSD several months later caused the value of both TerraUSD and Luna to plummet.
By the end of April 2022, Three Arrows held approximately $462m worth of Luna, which had diminished to just over $2,700 by 14 May, according to court documents. Concurrently, the value of Three Arrows’ other digital assets dropped by about $858m.
The extent to which funds can be recovered from TerraForm Labs remains uncertain. The company filed for Chapter 11 bankruptcy in January and is in the process of liquidation following its fraud liability finding. Do Kwon, who was arrested in Montenegro last year, faces charges in both the US and South Korea, with a recent ruling in Montenegro favouring his extradition to the latter.
