Bankruptcy Judge Approves Subpoenas for Three Arrows Co-Founders

By Stacy Elliott

Subpoenas are on the way to Three Arrows Capital co-founders Kyle Davies and Su Zhu, along with the rest of the crypto hedge fund’s leadership, as liquidators now have permission to demand communications, documents, and financial records related to the bankrupt firm.

The judge presiding over the bankruptcy proceedings signed the order to approve the subpoenas on Tuesday morning. Liquidators can now request “any recorded information, including books, documents, records, and papers” related to the hedge fund’s property or financial affairs since 2012, when the company was founded, according to the court order. 

Three Arrows Capital, which also goes by 3AC, filed for Chapter 15 bankruptcy protection in July. Chapter 15 is a designation that allows for cooperation between U.S. courts and those in the British Virgin Islands, where 3AC is registered. 

Although it wasn’t the only reason, 3AC’s co-founders have said publicly that they lost $200 million when Terra’s algorithmic stablecoin, TerraUSD (UST), lost its one-to-one peg with the U.S. dollar and went to zero.

After UST crashed and rumors swirled that 3AC had suffered a huge loss, BitMEX, FTX, and Derebit liquidated 3AC’s positions. 

The firm frequently used leveraged positions, meaning exchanges allowed it to trade with more funds than it actually had in hand. It’s a risky strategy, but increases the potential profits. If a position becomes too risky, an exchange can ask traders to add more of their own money to cover the margin. That’s what’s called a “margin call.” And when firms can’t meet a margin call, exchanges will liquidate their funds to cover their losses.

Voyager Digital, which itself filed for bankruptcy only days later, issued 3AC a default notice for an outstanding balance of more than $600 million.

Zhu and Davies seemingly disappeared after the order to liquidate, but they have since become vocal on social media in the wake of FTX’s bankruptcy. 

FTX founder and then-CEO Sam Bankman-Fried was critical of Terra after it collapsed and said on Twitter that 3AC’s own collapse “couldn't have happened with an on-chain protocol that was transparent.” Throughout the summer Bankman-Fried was vocal about wanting to stop the contagion that was threatening to bring down other crypto firms, including Voyager Digital and BlockFi—both of which have now had to file for bankruptcy protection. 

Things started to unwind for FTX when it was revealed that a large portion of the balance sheet at Alameda Research, Bankman-Fried’s trading desk, included FTX Token (FTT) and was illiquid. After that news broke, there was a mass sell-off of FTT and, within a week, FTX filed for bankruptcy and Bankman-Fried resigned.

Yesterday Zhu alleged on Twitter that former FTX CEO Sam Bankman-Fried sold and shorted clients’ Bitcoin and Ethereum deposits for Solana and FTX Token. 

“This is not just a crime [against] clients it's a crime [against] crypto,” the 3AC co-founder wrote. “He internalized billions of client buy flow for actual coins into his own shitcoins.” 

Meanwhile, Davies has said himself on Twitter that FTX and its sister company, trading desk Alameda Research, “hunted” 3AC’s trades. Within the last day, he asked where “all the FTX fanboys” have gone, saying that they “worshipped SBF’s every sneeze and were highly critical of 3AC’s.”

The Tuesday morning order granting permission to subpoena 3AC leadership also includes communication with: Zhu and Davies; the firm’s third director, Mark James Dubois; Davies’ wife, Kelly Kaili Chen, who lent money to the firm; Tai Ping Shin, a Cayman Islands-based company owned by Zhu and Chen; DeFiance Capital and its manager, Arthur Cheong; and Starry Night Capital, the firm’s NFT fund and its pseudonymous curator, Vincent Van Dough.

Last week, the Singapore high court gave the 3AC co-founders one week to submit affidavits after attempts to obtain information from Solitaire, one of the firm’s law firms, went unanswered. The next day, liquidators announced that they had seized $35 million worth of 3AC’s assets and were seeking information on the now-infamous $30 million “Much Wow” superyacht.

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