Three Arrows Capital Collapse and Its Aftermath Explained

Three Arrows Capital was a well-known hedge fund that managed billions of dollars in assets.

It was founded by Su Zhu and Kyle Davies in 2012.

The fund's collapse was a significant event in the crypto market, with reports suggesting that it lost around $10 billion.

This loss was largely due to the fund's exposure to TerraUSD (UST) and Luna, which were two cryptocurrencies that had a significant market downturn.

The collapse of Three Arrows Capital led to a series of events that had far-reaching consequences for the crypto market.

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Three Arrows Capital had a history of regulatory issues, starting with a breach of the Monetary Authority of Singapore's rules in June 2022.

The firm was reprimanded for having more than the allowed $250 million in assets under management, a condition of its fund management company registration. It also provided false or misleading information to the Monetary Authority of Singapore and failed to notify them of changes to directorships or shareholdings.

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In October 2022, Three Arrows Capital was under investigation by the U.S. Securities and Exchange Commission and the Consumer Financial Protection Bureau to determine if the firm had misled its investors about its balance sheet status.

The firm's failure to transparently communicate changes in directorships or shareholdings was another regulatory issue it faced, contributing to its downfall.

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The liquidation of Three Arrows Capital was a catastrophic event that had far-reaching consequences for the crypto industry. Over $3 billion was lost over 2021 and 2022.

The company's collapse was a major contributor to the bankruptcy of crypto lender Voyager Digital and layoffs at Blockchain.com. The industry blamed Three Arrows Capital for triggering a series of events that further destabilized the crypto market.

TAC's founders, Davies and Zhu, were uncooperative during the liquidation process.

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Three Arrows Capital's liquidation in June 2022 was a significant event in the crypto industry, with over $3 billion lost over 2021 and 2022.

The company's failure to meet margin calls and repay loans led to a cascade of events, including the bankruptcy of crypto lender Voyager Digital and layoffs at Blockchain.com.

Voyager Digital issued a notice of default against Three Arrows for failing to make required payments on a $665 million loan.

The liquidation of Three Arrows Capital also had a ripple effect on other companies, with Genesis Trading incurring substantial losses from loans to the firm.

Teneo was appointed as the liquidator of Three Arrows Capital, with Russell Crumpler and Christopher Farmer overseeing the process.

Three Arrows' founders, Davies and Zhu, were uncooperative during the liquidation process, and their whereabouts were unknown as of July 2022.

Davies and Zhu planned to move to the United Arab Emirates, a country without extradition agreements with Singapore or the United States.

As of June 2023, the liquidators were seeking to recover $1.3 billion from Davies and Zhu.

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A Chapter 15 case was commenced on July 1, 2022, by the Foreign Representatives.

The case was initiated with a motion seeking provisional relief, which was filed on July 8, 2022, to control and preserve the Debtor's assets.

The motion was granted on July 12, 2022, by an order that authorized the Foreign Representatives to take certain actions.

The order granted provisional relief, including the service of a subpoena, which was limited in scope.

On July 28, 2022, the Bankruptcy Court entered an order recognizing the foreign main proceeding and granting related relief.

This recognition order extended the provisional relief granted earlier and recognized the Foreign Representatives as foreign representatives under the Bankruptcy Code.

The recognition order also recognized the BVI Proceeding as a foreign main proceeding.

Su Zhu, a key figure associated with Three Arrows Capital, was arrested at Changi Airport in Singapore in late September 2023. Zhu was attempting to leave the country when he was apprehended.

He was arrested pursuant to a committal order that sentenced him to four months in prison for failing to cooperate with the company's liquidators. Davies' location remained unknown, but he is subject to the same committal order as Zhu.

The arrest highlights the ongoing investigation into the company's activities, which are now part of the corporate scandals category.

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In late September 2023, Zhu was arrested at Changi Airport in Singapore while trying to leave the country.

He was arrested pursuant to committal orders that sentenced him to four months in prison for failing to cooperate with the company's liquidators.

Davies' location remained unknown, but he is subject to the same committal order as Zhu.

This highlights the importance of complying with court orders and cooperating with liquidators in the event of a company's dissolution.

The company's disestablishment in 2022 led to a series of consequences, including Zhu's arrest and Davies' unknown whereabouts.

So far, the investigation has been ongoing for several months, with authorities gathering evidence and interviewing witnesses.

The police department has received over 100 tips from the public, many of which have been thoroughly investigated.

Detectives have been working around the clock to review the case files and analyze the evidence collected.

A total of 27 people have been interviewed as part of the investigation, including the suspect's family members and friends.

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The suspect's phone records have been obtained and are currently being analyzed for any potential connections to the crime.

A search warrant was executed at the suspect's residence, yielding several pieces of evidence that are now being examined in the lab.

The investigation has also led to the discovery of several inconsistencies in the suspect's alibi, which are currently being looked into further.

The BVI Proceeding was initiated on June 27, 2022, after the Debtor's business collapsed due to extreme fluctuations in cryptocurrency markets.

The Debtor, Three Arrows Capital Limited, filed a liquidation proceeding in the High Court of Justice Virgin Islands (Commercial Division), known as the BVI Court.

The case was captioned In re Three Arrows Capital Limited, Case No. BVIHCOM2022/0119, and the BVI Court appointed the Foreign Representatives as joint liquidators of the Debtor.

The Foreign Representatives were appointed on the basis of a Provisional Relief Order, which was issued by the BVI Court.

TAC became a substantial player in the cryptocurrency arena with a publicly claimed net asset value of $18 billion.

The fund managed approximately $10 billion in crypto assets, according to Nansen, a blockchain analytics firm, in March 2022.

Speculation suggested a significant portion of these assets might have been acquired through uncollateralized borrowing from various lending platforms.

TAC backed multiple high-profile crypto projects, amassing a sizable following on social media.

Three Arrows Capital faced significant financial and regulatory challenges that ultimately led to its downfall. The fund failed to meet margin calls and repay loans, resulting in default notices and court-ordered liquidation.

Regulatory issues were a major contributor to TAC's demise. The Monetary Authority of Singapore's rules were violated, and the fund was reprimanded for providing false or misleading information.

TAC's failure to transparently communicate changes in directorships or shareholdings also raised red flags. This lack of transparency further exacerbated the regulatory challenges the fund was facing.

In addition to these issues, US agencies investigated TAC for potential misinformation to investors regarding its balance sheet status. This investigation added to the fund's woes and contributed to its eventual collapse.

After the collapse of Three Arrows Capital (TAC), its founders, Su Zhu and Kyle Davies, initiated another crypto-related venture named Open Exchange in Hong Kong.

The financial community was skeptical of this new venture, given the controversy surrounding TAC's collapse.

In June 2023, Zhu and Davies launched a new cryptocurrency, attempting to recreate the early success of TAC.

However, their past mistakes continued to haunt them, and they faced legal challenges once again.

Su Zhu was arrested in Singapore in September 2023 for failure to cooperate with TAC's liquidators.

Kyle Davies' whereabouts remained unknown, despite facing the same legal predicament as Zhu.

These legal complications demonstrate the ongoing consequences of TAC's collapse and the difficulties its founders faced in trying to revive their reputation in the crypto industry.

The court's order is specifically designed to prevent the Founders and Ms. Kelly Chen from disposing of or otherwise dealing with assets in any way that might frustrate eventual enforcement by the liquidators.

Teneo's statement highlights the legal obligations and risks faced by counterparties and affiliates of the Founders of Three Arrows.

The order sends a clear signal to these parties, making it clear that they must comply with the law and take necessary precautions to avoid any potential risks.

In the context of Three Arrows Capital, the analysis of the Foreign Representatives' Service Motion reveals that the scope of Federal Rule of Civil Procedure 45 is a crucial factor. The motion implicates issues regarding the scope of this rule.

The Foreign Representatives failed to show that Rule 45 supports issuance of subpoenas to certain parties, including Zhu, the Investment Managers, and Troy Trade. As a result, the Service Motion was denied for these parties.

The collapse of Three Arrows Capital serves as a stark reminder of the volatile nature of crypto investments. The fund's rapid rise and eventual downfall had significant repercussions for its founders and the broader cryptocurrency market.

Crypto investments can be incredibly risky, and the story of TAC is a prime example. The fund's collapse highlights the importance of regulatory compliance in the fast-paced world of digital finance.

The cryptocurrency market is often unregulated, which can lead to unpredictable outcomes like TAC's collapse. This lack of oversight can have far-reaching consequences.

The story of TAC serves as a cautionary tale for investors, regulators, and the industry as a whole. It underscores the need for transparency, cooperation, and due diligence in digital finance.

The Foreign Representatives' Service Motion implicates issues regarding the scope of Federal Rule of Civil Procedure 45. The Court addressed the issues in turn, ultimately denying the Service Motions for Zhu, the Investment Managers, and Troy Trade.

Rule 45 does not support the issuance of subpoenas to these parties, as the Foreign Representatives failed to show sufficient evidence. This is a crucial finding, as it sets a precedent for future cases involving similar issues.

The Court did, however, grant the Service Motion with respect to Kyle Davies, finding that Rule 45 supports the issuance of a subpoena against him. This decision was made after reviewing the supplemental briefing and evidentiary submissions from the Foreign Representatives.

The Foreign Representatives also proposed an alternative method of service, which the Court deemed warranted in this case. This is a significant development, as it highlights the flexibility of the Court in handling complex service issues.

The Court's decision to grant the Service Motion with respect to Davies suggests that the Court is willing to consider alternative methods of service in certain cases. This is an important takeaway for practitioners and parties involved in similar proceedings.

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