Liquidators Pursue $1.3 Billion Claim Against Terraform Labs

The liquidators of the defunct cryptocurrency hedge fund Three Arrows Capital (3AC) have filed a significant claim against Terraform Labs, alleging misrepresentation about the stability of tokens within the Terra ecosystem.

Background of the Claim

On August 9, 2023, 3AC liquidators submitted a claim in the bankruptcy proceedings of Terraform Labs in Delaware federal court, demanding $1.3 billion in damages resulting from the collapse of the Terra ecosystem in May 2022.

According to the claim, Terraform Labs allegedly provided misleading information regarding the stability of key assets, including Terra’s algorithmic stablecoin, TerraUSD (UST), and its associated token, Terra Luna (LUNA). This information led 3AC to make significant investments at a time when UST had already depegged from its dollar value, contributing to a substantial crash in the ecosystem.

Accusations of Misleading Information

Representatives for the liquidators, Russell Crumpler and Christopher Farmer from Teneo Holdings, assert that Terraform Labs promoted its tokens in a way that artificially inflated their market prices. They argue that such misrepresentation prompted 3AC to invest heavily, ultimately leading to severe financial losses as the Terra ecosystem collapsed, affecting numerous other cryptocurrency firms.

The liquidators are seeking compensation for 3AC’s direct purchases of UST and Luna, as well as related damages due to the complete loss of value in these cryptocurrencies following the crash.

This new claim follows a prior ruling in which Terraform Labs co-founder Do Kwon was found liable for defrauding investors in a civil case involving the U.S. Securities and Exchange Commission, which occurred in April 2024. Kwon, previously incarcerated in Montenegro under extradition requests from the U.S. and South Korea, has faced intense scrutiny over his role in the Terra collapse.

3AC’s Bankruptcy Status

Three Arrows Capital was established in 2012 by Su Zhu and Kyle Davies, Columbia University alumni, and quickly became one of the largest cryptocurrency hedge funds, managing up to $18 billion in assets at its peak.

Following the collapse of the Terra ecosystem, 3AC was unable to meet its margin calls and subsequently filed for bankruptcy in late 2022. The firm is currently navigating insolvency proceedings in the British Virgin Islands.

In a notable development last year, a court in the British Virgin Islands imposed restrictions on 3AC co-founders, preventing them from transferring or selling assets valued at approximately $1.1 billion. The liquidators estimate that creditors of 3AC are owed around $3.3 billion overall due to the firm’s downfall.