3AC Liquidators Drag Terraform Labs to Court over LUNA Crash

• Defunct Three Arrows Capital has targeted Terraform Labs in a lawsuit.
• The firm has resurrected token manipulation claims.
• Terraform Labs is facing major financial obligations.

The collapse of Three Arrows Capital , a crypto hedge fund that suffered a major implosion in 2022, marked one of the most controversial chapters of the crypto industry. Losses totaled $3.3 billion. Since then, liquidators have been actively pursuing the recovery of these lost funds, launching legal actions against individuals and entities connected to the collapse.

After a lengthy period off the radar, the firm has resurfaced with a new target.

Battle of the Bankrupts: Three Arrows Capital vs Terraform Labs

The latest target in a lawsuit by Teneo Holdings, the court-appointed liquidators of the ill-fated crypto hedge fund Three Arrows Capital, is TerraForm Labs. On Monday, August 12, 2024, Bloomberg reported that the the liquidators filed a lawsuit against the bankrupt Do-Kwon founded firm, seeking a staggering $1.3 billion in penalty for the 2022 Luna crash .

According to the report, the lawsuit claims that Terraform Labs’s manipulation of Luna and TerraUSD and artificial inflation of the tokens’ prices misled 3AC to invest in the assets, resulting in substantial losses following their collapse.

The latest legal action follows a similar inquiry by the liquidators into the hedge fund’s founders, Su Zhu and Kyle Davies, regarding the whereabouts of billions in assets belonging to the fallen fund amid efforts to compensate creditors impacted by the collapse.

Despite the severity of the charges against Terraform Labs, the firm’s extensive financial obligations raise uncertainty about whether it can afford to meet the claims.

Can Terraform Labs Afford 3AC’s Bill?

In January 2024, Terraform Labs voluntarily filed for Chapter 11 bankruptcy protection for its defunct TerraUSD in the United States Bankruptcy Court for the District of Delaware.

Terraform declared its assets in the filing, estimating their value to fall within $100 to $500 million. This figure is significantly below the $1.3 billion sought by Three Arrows Capital, raising doubts about their ability to pay the full penalty if needed.

Additionally, the firm and its co-founder, Do Kwon, currently owe approximately $4.5 billion to the US Securities and Exchange Commission (SEC). This stems from the June Court ruling of a settlement in the long-standing legal battle of the LUNA crash, and a significant portion of the penalties is expected to be directed to Terraform Labs’ creditors . 

On the Flipside

• Should the court rule in favor of 3AC liquidators, the resulting financial obligations may hinder successful creditor settlements.
• Three Arrows Capital previously reclaimed $45 million in September 2022.
• In September 2023, Singapore issued a nine-year ban on 3AC founders.

Why This Matters

The 2022 Terra LUNA collapse undoubtedly triggered a domino effect of further financial implosions, and the legal action by 3AC liquidators against Terraform Labs underscores the lingering impact of the crash even years later.

Read more about the fall of Three Arrows Capital and the firm’s distribution of blame:
Three Arrows Capital (3AC) Founder Blames DCG and FTX for Terra (LUNA) Collapse  

Crypto-centric political efforts are intensifying ahead of the upcoming US elections; read this article to find out more:
Pro-Crypto Deaton’s Campaign to Oust Warren Gets $1M from Super PAC