FTX Rejects 3ACs $1.53 Billion Claim As Self Inflicted

FTX’s legal team has strongly contested a $1.53 billion claim filed by the failed crypto hedge fund Three Arrows Capital (3AC), labeling the demand as illogical and warning that it would unfairly deplete funds from FTX’s legitimate creditors. In court documents submitted on June 20, FTX’s lawyers requested a Delaware bankruptcy judge to dismiss 3AC’s entire claim, asserting that the hedge fund’s alleged losses were self-inflicted through excessive risk-taking and ignoring margin calls, rather than due to any misconduct by FTX.

The dispute revolves around margin trades that 3AC executed on FTX’s exchange in 2022. At that time, 3AC, which had borrowed extensively across the crypto sector, utilized a $120 million credit facility from FTX to fund large positions. According to FTX, 3AC breached margin requirements in June 2022 following the collapse of the TerraUSD stablecoin, which triggered a broader market downturn. When FTX notified 3AC that its account had fallen below the required collateral thresholds, the firm allegedly failed to respond for over six hours and instead withdrew $18 million worth of Ethereum (ETH), exacerbating the shortfall.

FTX, facing what it described as an urgent credit breach, liquidated 3AC’s account, recovering $82 million. FTX’s attorneys maintain that this liquidation was not only contractually permissible but also prevented a larger deficit in the estate’s balance sheet. They argued that without the liquidation, the accounts would have been $18 million underwater at the time of FTX’s petition, and that no action by FTX resulted in any loss of value. Therefore, the assertion that 3AC has a claim against FTX is deemed a fiction.

The filing accused 3AC of using an unreasonable and unsupportable starting premise to inflate its original $120 million claim more than tenfold. To bolster its position, FTX submitted testimony from Steven P. Coverick, managing director at consulting firm Alvarez & Marsal, who reconstructed the trades in question and concluded that the forced sale was justified and necessary to prevent further losses. The estate also provided an expert opinion from British Virgin Islands King’s Counsel Stephen Atherton, who dismissed 3AC’s legal theory under BVI law as unsound.

FTX’s counsel argued that 3AC’s attempt to recover billions is a bid to salvage its own failed liquidation process and shift blame to FTX’s remaining creditors, who are still awaiting repayment after the exchange’s collapse in November 2022. The lawyers stated that 3AC seeks to extract value from the debtors’ estates at the expense of legitimate creditors to salvage their own failed liquidation proceedings. However, FTX creditors should not and cannot serve as a backstop for 3AC’s failed trading strategy.

The clash represents the latest development in the multi-billion dollar web of claims and counterclaims stemming from the dramatic downfall of both crypto firms. Under the current schedule, 3AC must file its formal response by July 11, with a non-evidentiary hearing set for August 12 in Delaware. Lawyers for 3AC did not immediately respond to requests for comment.