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Three Arrows Capital Founders Are Beyond Prosecutors- What Hope For Investors?

Su Zhu and Kyle Davies
Su Zhu and Kyle Davies

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Liquidators for bankrupt crypto hedge fund Three Arrows Capital (3AC) have said that its founders have refused to cooperate with asset recovery efforts, which according to them, is obstructing the company’s ability to return funds to creditors.

According to a decision from Judge Martin Glenn during a virtual hearing for the Southern District of New York Bankruptcy Court on December 2, liquidators for 3AC will have to present more documents for them to secure permission to subpoena the founders of now bankrupt crypto hedge funds via Twitter.

In a statement during a bankruptcy court session in New York, the liquidators’ attorney, Adam Goldberg, said that founders Kyle Davies and Su Zhu are more interested in salvaging their reputation than saving their own company’s creditors. The statement came after Goldberg and his team said Davies and Zhu have repeatedly been unable to engage with liquidators over the past few months. In the hearing presentation, Goldberge said:

“A communication protocol was agreed between the liquidators and founders but has not yielded satisfactory cooperation.”

In a court filing dated Friday, December 2, the liquidators said that the founders are currently based in the United Arab Emirates (UAE) and Indonesia. It is worth noting that these countries have a reputation for not cooperating with international court orders.

Reportedly, Davies and Zhu have also refused to accept service through their Singapore counsel, an action that compelled the liquidators to seek alternative means to subpoena the two 3AC founders. The same day this was happening, U.S. regulators launched an investigation into possible violations by 3AC concerning whether the hedge fund misled investors and failed to register with the appropriate agencies.

FTX Linked To Three Arrows Capital Collapse

Recently also, Goldberg did interviews where he commented on the crisis that befell the crypto exchange FTX. During the interview, the attorney attempted to shift blame for Three Arrows’ own collapse. In his words, “It is interesting to say the least, that the first time we’ve heard this theory that FTX caused the downfall of this debtor was after FTX’s own sensational collapse.”

Speaking to CNBC on November 16, Davies commented that FTX and its corporate sister Alameda Research “hunted our positions,” destroyed the price of LUNA crypto, and “took us down,” adding that he was cooperating with liquidators of the fund.

Goldberg also highlighted that Davies and Zhu had taken steps to undermine asset recovery efforts. saying that someone had “ransacked” hard drives from Three Arrows offices before the liquidators accessed them.

Investigators also established that the founders had used company funds on a super-yacht christened “Much Wow.” The liquidators are trying to recover $30 million that was spent on the yacht, with Goldberg adding that they will bring other recovery actions soon.  

Some Of Creditors’ Assets Already Recovered

Despite limited access to records and accounts, liquidator Russel Crumpler told the court that Three Arrows Capital liquidators have already recovered some assets that belong to creditors.

Part of the recovery includes $35 million in fiat currencies that was held by Singaporean banks or by the company’s pre-appointment lawyers, alongside more than 60 different crypto tokens, held in a digital currency custody account. These are in the control of the liquidators and converted to U.S. dollars as needed.  Crumpler also assured that recovery efforts remain ongoing.

However, Crumpler has not revealed how much crypto has been recovered by the liquidators. Nevertheless, he said that Singapore-based Three Arrows has taken back control over accounts holding over 60 different types of crypto tokens.

Three Arrows Capital was the giant crypto firm to file for bankruptcy in 2022, a fall hugely attributed the May collapse of Luna and TerraUSD cryptos. The hedge fund filed for Chapter 11 protection in late June 2022 in the British Islands. It is the same court that appointed the liquidators to close down the company and work on paying its debts.

Besides the British Islands, Three Arrows capital also filed for a parallel bankruptcy case in Manhattan in an attempt to protect Three Arrows’ U.S. assets.

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