Three Arrows Liquidators Seek $1.3 Billion Over 2022 Luna Crash

(Bloomberg) -- Liquidators for the failed cryptocurrency hedge fund, Three Arrows Capital, are seeking at least $1.3 billion from TerraForm Labs Pte., the bankrupt digital assets business co-founded by Do Kwon, for losses the fund suffered following the 2022 crash of his related TerraUSD and Luna tokens.

TerraForm induced Three Arrows to purchase Luna and TerraUSD by manipulating the market for these tokens “in a manner that artificially inflated the price for the assets” before they were wiped-out, the liquidators said in court papers. The crash not only wiped out Three Arrows’ investment in those tokens but caused substantial losses in its other holdings, they said.

Three Arrows, once one of crypto’s most famous hedge funds, collapsed soon after Luna and TerraUSD crashed along with a handful of other large crypto businesses. A British Virgin Islands court subsequently appointed liquidators — partners at the consulting and advisory firm Teneo — who have sought to recover a similar amount from the hedge funds’ founders, Su Zhu and Kyle Davies, and other firms to repay Three Arrows’ creditors. 

Meanwhile in April, a jury found TerraForm and Kwon liable for fraud in a US government lawsuit over Luna’s collapse.

TerraForm’s bankruptcy lawyers didn’t immediately return a message Monday seeking comment.

Liquidators said Three Arrows acquired $190 million worth of Luna in January 2022 as part of a larger $1 billion deal that included other investment firms. A massive selloff of TerraUSD several months later caused the value of the token and Luna to deteriorate. 

Three Arrows’ held about $462 million worth of Luna at the end of April 2022, but that value plummeted to a little more than $2,700 by May 14, according to court documents. The net value for Three Arrows’ other digital holdings plummeted by roughly $858 million over the same period.

How much money will be recovered from TerraForm is unknown. TerraForm filed Chapter 11 in January and is preparing to liquidate after it was found liable for fraud earlier this year. Kwon was arrested last year in Montenegro and is facing charges in the US and his native South Korea. A Montenegro court ruled recently that Kwon should be extradited to South Korea.

The case is TerraForm Labs Pte. Ltd., number 24-10070, in the US Bankruptcy Court for the District of Delaware.

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