The once-prominent crypto hedge fund, Three Arrows Capital (3AC), has faced a catastrophic collapse, leading to liquidators pursuing a $1.3 billion lawsuit against TerraForm Labs. TerraForm Labs, the bankrupt digital assets company co-founded by Do Kwon, is accused of manipulating the market for Luna and TerraUSD, resulting in artificially inflated prices for these tokens. This alleged manipulation ultimately led to substantial losses for 3AC’s creditors, wiping out their investments in these assets.
The Investment and Losses
In January 2022, 3AC acquired $190 million worth of Luna as part of a $1 billion deal, which included investments from other firms. However, a significant sell-off of TerraUSD a few months later triggered a sharp decline in both TerraUSD and Luna, drastically reducing the value of 3AC’s investment. By April 2022, 3AC’s Luna holdings were valued at approximately $462 million, but by May 14, that value had plummeted to just over $2,700. The collapse of these tokens also led to a decrease in the net value of 3AC’s other digital assets by about $858 million.
TerraForm Labs, which filed for Chapter 11 bankruptcy in January, is currently in the process of liquidation after being found liable for fraud. The lawsuit against TerraForm Labs is just one of several actions initiated by 3AC’s liquidators, who are also pursuing claims against the fund’s founders, Su Zhu and Kyle Davies. The situation has escalated to the point where Zhu has reportedly been trying to sell at least one of his upscale properties amid the ongoing liquidation process.
The fallout from the collapse of LUNA and the subsequent legal actions have had far-reaching consequences. Do Kwon, co-founder of TerraForm Labs, was arrested in Montenegro last year and now faces charges in both the United States and South Korea. The once-thriving Three Arrows Capital has now become a cautionary tale in the crypto investment world, highlighting the risks and uncertainties inherent in the industry.
The $1.3 billion lawsuit against TerraForm Labs by 3AC’s liquidators serves as a stark reminder of the volatility and potential pitfalls of the crypto market. The rapid rise and fall of assets like Luna and TerraUSD underscore the need for thorough due diligence and risk management in the investment process. As the legal battle continues to unfold, the future of both Three Arrows Capital and TerraForm Labs remains uncertain, leaving investors and industry observers to ponder the lessons learned from this high-stakes saga.
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