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FTX’s bankruptcy estate has formally challenged a $1.5 billion claim filed by Three Arrows Capital (3AC), disputing the hedge fund’s attempt to recover losses from its high-risk crypto positions.
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The legal contention revolves around the actual value of 3AC’s holdings on FTX at the time of both entities’ collapse, with FTX asserting a significantly lower net balance after accounting for margin debts.
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According to COINOTAG, the FTX Recovery Trust described 3AC’s claim as “illogical and baseless,” emphasizing that FTX creditors should not bear the burden of 3AC’s failed leveraged trades.
FTX disputes Three Arrows Capital’s $1.5 billion claim, highlighting margin debts and liquidation details that could limit 3AC’s recovery in the ongoing bankruptcy case.
FTX Bankruptcy Estate Disputes Three Arrows Capital’s $1.5 Billion Claim
The ongoing legal battle between FTX’s bankruptcy estate and Three Arrows Capital centers on the valuation of 3AC’s account at the time of the crypto market crash in mid-2022. While 3AC asserts its account balance was nearly $1.6 billion, FTX’s Recovery Trust counters that the actual net value was closer to $284 million after deducting $733 million in margin debt. This significant discrepancy forms the crux of the dispute, with FTX’s legal team arguing that 3AC’s claim ignores its liabilities and unfairly seeks to transfer losses to other creditors.
Margin Debt and Liquidation: Key Factors in the Dispute
FTX’s objection filing details how most of the $284 million net value evaporated during a sharp two-day market downturn in June 2022, with $222 million lost to market declines and $60 million withdrawn by 3AC itself. The estate emphasizes that only $82 million was liquidated by FTX, a move fully compliant with contractual terms designed to protect the account from going negative. This liquidation, FTX argues, was a necessary step to preserve value rather than a punitive seizure of assets.
Expansion of 3AC’s Claim and Legal Proceedings
Initially filed at $120 million in mid-2023, 3AC’s claim expanded dramatically to $1.53 billion by November 2024. The hedge fund’s liquidators contend that FTX breached its fiduciary duties by delaying disclosure of critical liquidation details. While Chief Judge John Dorsey has ruled in favor of 3AC on certain discovery matters, the overall validity of the claim remains under judicial review. The upcoming court hearing scheduled for August 12 will be pivotal in determining the claim’s fate.
Implications for Creditors and Future Recoveries
If the court sides with FTX’s position, 3AC’s claim could be entirely disallowed or downgraded to an unsecured status, substantially limiting any potential recovery. The estate’s argument highlights the importance of accurately accounting for liabilities and market conditions in bankruptcy claims, underscoring the risks associated with leveraged crypto trading. This case serves as a critical precedent for how failed crypto hedge funds’ claims are treated in bankruptcy proceedings.
Conclusion
The dispute between FTX and Three Arrows Capital encapsulates the complexities of bankruptcy claims in the volatile crypto sector. With significant differences in account valuations and contested liquidation practices, the outcome will have lasting implications for creditor recoveries and the treatment of leveraged positions in future insolvencies. Stakeholders should closely monitor the August hearing for decisive rulings that could reshape bankruptcy claim protocols within the crypto industry.
