FTX Rejects 3ACs $1.53 Billion Claim Over 2022 Crypto Meltdown

FTX, the bankrupt crypto exchange, has strongly contested a $1.53 billion claim by the defunct hedge fund Three Arrows Capital (3AC), labeling it as illogical and a threat to the recovery prospects of its own legitimate creditors. In a court filing made on June 20 before a Delaware bankruptcy court, FTX's legal team petitioned the judge to dismiss the demand by 3AC entirely. The filing argued that 3AC's losses were a result of its own reckless trading habits, including excessive lending and borrowing funds, and not due to any malpractice by FTX.

The core of the dispute revolves around a $120 million credit facility that FTX provided to 3AC during the market turmoil preceding the crypto meltdown of mid-2022. At that time, 3AC was heavily engaged in positions within the sector, including on the FTX platform. The collapse of the TerraUSD (UST) stablecoin in June 2022 acted as a catalyst for a broader market domino effect. In FTX's case, 3AC's margin account on the platform violated collateral conditions, but FTX did not respond to alerts about the critical need to address the loss. Instead, 3AC withdrew $18 million worth of Ethereum, exacerbating the situation.

FTX asserted that it had to liquidate 3AC's positions out of necessity, recovering $82 million to avoid an even greater financial hole. According to FTX's 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." The estate also argued that 3AC used an irrational and unrealistic starting premise, inflating its claim from $120 million to $1.53 billion.

FTX supported its claims by submitting a testimony from Steven P. Coverick, a managing director at Alvarez and Marsal, who viewed the trades in question as liquidable. Additionally, Britain Virgin Island King Counsel Stephen Atherton rejected 3AC's legal views under British Virgin Island law, citing that they were fundamentally flawed. FTX's attorneys presented the case as an attempt by 3AC liquidators to recover losses from their own failed wind-up undertaking and shift the blame to FTX's beleaguered bankruptcy estate, which has yet to repay customers' losses from the November 2022 implosion.

The court battle highlights the complexities of intersecting bankruptcies and cross-claims within the cryptocurrency industry. Both FTX and 3AC faced significant collapses in 2022 and are still embroiled in lawsuits that are delaying payouts to thousands of investors. According to the existing court schedule, 3AC must file a formal response by July 11, and a non-evidentiary hearing will be held on August 12 in Delaware.

The emerging legal dispute between FTX and 3AC underscores the financial and legal complexities of the 2022 crypto meltdown. The decision will have major implications for creditor recoveries and could set precedents for how collapsed crypto companies resolve multi-billion-dollar disagreements in bankruptcy as court deadlines loom.