Key Takeaways
- The claim alleges that Terraform Labs artificially inflated the prices of its TerraUSD (UST) and Terra Luna (LUNA) tokens.
- 3AC alleges that the actions by Terraform misled the hedge fund into making substantial investments in these tokens.
Liquidators of the failed cryptocurrency hedge fund Three Arrows Capital (3AC) have filed a $1.3 billion claim against Terraform Labs. This lawsuit is part of 3AC’s ongoing efforts to recover losses following the dramatic collapse of the Terra ecosystem in May 2022.
The claim, lodged in Delaware federal court on August 9, 2024, alleges that Terraform Labs, which was co-founded by Do Kwon, artificially inflated the prices of its TerraUSD (UST) and Terra Luna (LUNA) tokens. According to court documents, these actions misled 3AC into making substantial investments in these tokens.
Three Arrows Capital filed for bankruptcy in July 2022, citing “extreme fluctuations” in the crypto markets after it had endured losses from the Terra Luna network collapsing two months earlier.
3AC made a series of large directional trades in Grayscale Bitcoin Trust (GBTC), Luna Classic (LUNC) and Staked Ether (stETH) and borrowed funds from 20 plus large institutions. The Terra Luna May crash led to a series of spiral investment collapses for the hedge fund.
According to the court filing, 3AC owes $3.5 billion to 27 companies, including Blockchain.com, Voyager Digital, and lender Genesis Global Trading. 3AC’s implosion created a ripple effect across the crypto sector, forcing several firms to file for bankruptcy protection.
3AC, founded in 2012 by Su Zhu and Kyle Davies, was one of the world’s biggest crypto hedge funds, handling a staggering $18 billion in assets under management at its peak.
Three Arrows Capital held approximately $462 million worth of LUNA at the end of April 2022. However, by mid-May 2022, the value of these holdings had plummeted to around $2,700. This drastic decline in value was part of a broader collapse that saw the net value of 3AC’s other digital assets drop by about $858 million.
The hedge fund’s downfall came shortly after the TerraUSD and Luna crash. The British Virgin Islands court appointed Teneo, a consulting firm, to handle 3AC’s liquidation and recover funds for creditors. Teneo has estimated that 3AC owes its creditors roughly $3.3 billion. In December 2023, the court froze around $1.14 billion in assets belonging to 3AC co-founders Su Zhu and Kyle Davies, prohibiting them from transferring or selling these assets.
The $1.3 billion claim from 3AC seeks to address what the liquidators argue were misleading practices by Terraform Labs. The claim states that Terraform Labs marketed its tokens in a way that artificially inflated their value, leading to significant financial losses for 3AC. The outcome of this legal battle will determine how much, if any, of the claimed amount 3AC can recover from Terraform Labs.
The latest development comes months after Terraform Labs and co-founder Do Kwon were held liable for defrauding investors in its civil case with the United States Securities and Exchange Commission.
SEC Enforcement Director Gurbir Grewal alleges that Terraform Labs and Kwon, its former CEO, deceived investors about the stability of the algorithmic stablecoin Terra USD, and misled investors about whether a popular payment application used Terraform’s blockchain to process and settle payments.
