- FTX seeks dismissal of 3AC’s $1.53B claim, citing 3AC’s own trading missteps.
- FTX says 3AC liquidation was justified, preventing deeper losses.
- Experts call 3AC’s claim inflated and legally flawed.
Bankrupt crypto exchange FTX has launched a vigorous legal defense against a claim of 1.53 billion dollars by failed hedge fund Three Arrows Capital (3AC) that it believed was founded on mismanagement there.
The court documents filed by the legal representatives of FTX on June 20 in Delaware requested a bankruptcy judge to dismiss the whole claim. They argued that any unrealised trading losses in 3AC could be attributed to its irresponsible actions, such as a high-risk exposure, and fails on margin calls and not due to any wrongdoing imminent on FTX.
The attorneys described the request as being illogical and opening the doors to the certification of it would result in an unreasonable redirection of capital to unworthy creditors. According to the lawyers:
“The accounts would’ve been $18 million underwater at FTX’s petition date had the liquidation not occurred. No action by FTX resulted in any loss of value, and thus the assertion that 3AC has a claim against FTX is a fiction.”
FTX Blames 3AC for Margin Rule Violations
The legal battle revolves around margin trades that 3AC performed on FTX platform in 2022. As it happened, the hedge fund had a $120 million credit line with FTX to back its large trading positions. The filing alleges that in June 2022, 3AC had violated its margin requirements after the crash of crypto stablecoin TerraUSD that rocked the larger crypto world.
FTX argues that once it notified 3AC that its balance had dropped below the collateral obligations, the firm took more than six hours to follow up on it. Rather, it supposedly cashed out 18 million dollars in Ethereum (ETH), making the deficit worse. On the basis of what it termed a credit breach which it said was urgent, Futures Exchange then later liquidated the position of 3AC to gain back 82 million. The lawyers of the exchange argue that this move was within the scope of its contract as well as that it saved more harm to the bankruptcy estate.
Legal Experts Dispute 3AC’s BVI Argument
The filing by FTX continues to blame 3AC with basing its argument on an irrational and unsustainable underlying assumption, overstating its initial credit exposure of $120 million, by more than 10 times. The legal team at the exchange resorted to expert opinion of a managing director of Alvarez & Marsal, Steven P. Coverick, who assembled a trade reconstruction and opined that liquidation was necessary as the losses were mounting.
Besides, FTX submitted a legal opinion of Stephen Atherton, King in the British Virgin Island, questioning the legal theory of 3AC that suggests that the BVI law was void under the BVI law. Both professional evaluations were set to debunk the basis of 3AC claim.
Attorneys of FTX said that the case portrays an attempt by 3AC (to) recover its own unsuccessful liquidation process by imposing and trying to get value out of its creditors who have yet to be repaid after Futures Exchange collapsed in November 2022. The lawyers argued:
“[3AC seeks] to extract value from the Debtors’ estates at the expense of legitimate creditors in order to salvage their own failed liquidation proceedings. But FTX creditors should not and cannot serve as a backstop for 3AC’s failed trading strategy.”
The fight is the next step in a complicated legal fallout related to the fall of both Futures Exchange and 3AC, two big players in the crypto universe, and whose collapse rocked the industry. The trials have resulted in a jungle of conflicting claims as the crushers jostle to get paid out of the debris.
According to the existing court schedule, 3AC must present its official answer on July 11. It is planned that a non-evidentiary hearing will occur on August 12, in Delaware. On Saturday, 3AC lawyers did not reply to comment requests.
