Three Arrows Capital Liquidators Seek $1.3 Billion from Terraform Labs

TLDR

• Three Arrows Capital (3AC) liquidators have filed a $1.3 billion claim against Terraform Labs in U.S. Bankruptcy Court.
• The claim alleges Terraform Labs manipulated the market for LUNA and UST, artificially inflating prices.
• 3AC suffered massive losses when the Terra ecosystem collapsed in May 2022.
• Terraform Labs and its former CEO Do Kwon recently agreed to a $4.5 billion settlement with the SEC.
• The 3AC liquidators are seeking damages for direct losses on UST and LUNA purchases, as well as associated losses on other cryptocurrency investments.

Liquidators of Three Arrows Capital (3AC) have filed a $1.3 billion claim against Terraform Labs. The claim, submitted to the U.S. Bankruptcy Court for the District of Delaware on August 9, 2024, alleges that Terraform Labs engaged in market manipulation that led to substantial losses for the now-defunct cryptocurrency hedge fund.

According to the court documents, 3AC liquidators assert that Terraform Labs “engaged in a scheme to manipulate the open market for LUNA and UST in a manner that artificially inflated the price for the assets.”

This alleged manipulation, they claim, induced 3AC to make substantial investments in these tokens, ultimately resulting in catastrophic losses when the Terra ecosystem collapsed in May 2022.

The Terra crash sent shockwaves through the cryptocurrency industry, leading to the downfall of several major players, including 3AC. At its peak, 3AC was one of the world’s largest crypto hedge funds, managing assets worth up to $18 billion.

The fund’s collapse in the wake of the Terra implosion marked one of the most significant failures in the crypto industry’s history.

The liquidators, Russell Crumpler and Christopher Farmer of Teneo Holding, argue that Terraform Labs provided misleading information about the stability of its tokens, particularly the algorithmic stablecoin TerraUSD (UST) and its sister token Terra Luna (LUNA).

This misinformation, they contend, led 3AC to invest heavily in these assets just months before their catastrophic depegging event.

The claim details 3AC’s substantial exposure to Terra tokens. In January 2022, 3AC acquired $190 million worth of Luna as part of a larger $1 billion deal involving other investment firms.

By late April 2022, the value of 3AC’s Luna holdings had risen to $462 million. However, following the TerraUSD sell-off in May, this value plummeted to a mere $2,700 by May 14. The ripple effects were severe, with the net value of 3AC’s other digital holdings reportedly falling by $858 million in the same period.

The 3AC liquidators are not only seeking compensation for direct losses on UST and LUNA purchases but also for the “complete loss of value of 3AC’s cryptocurrency investments caused by the collapse of LUNA and UST.” This broader claim underscores the far-reaching impact of the Terra crash on 3AC’s overall portfolio.

This legal action comes in the wake of other significant developments related to the Terra collapse. In July 2024, the U.S. Securities and Exchange Commission (SEC) announced that Terraform Labs and its former CEO, Do Kwon, had agreed to pay approximately $4.5 billion as part of a settlement agreement.

The defendants were found liable on civil fraud charges following the $40 billion collapse of the Terra ecosystem.

Do Kwon, who was arrested in Montenegro last year, faces charges in both the United States and South Korea. A Montenegro court has ruled that Kwon should be extradited to South Korea, though the final decision on his extradition is still pending.