According to a Bloomberg News report on Monday, the crypto hedge fund, Three Arrow Capital, is being probed by U.S. regulators on whether it misled investors.
Federal agents, CTFC and SEC, are investigating whether the bankrupt hedge fund violated rules by deceiving investors with information about its balance sheet and failure to register with them.
The Collapse of Three Arrow Capital
Founded in 2012 by Kyle Davies and Su Zhu, Three Arrow Capital was one of the industry’s most successful firms in its heyday.
While the company began by focusing on arbitraging emerging-market foreign-exchange derivatives, it soon moved to cryptocurrencies after the fund was booted from the market in 2017.
The firm backed significant projects in the industry, from Ethereum and Polkadot to the fallen Terra Luna stablecoin. They were known for endorsing these projects ahead of their price rallies.
In June, an FTX article was published detailing the events that pointed to the possibility of 3AC facing insolvency. According to the article and other news reports, 3AC took a $400 million hit in liquidation after the assets it pushed took “double-digit losses in market valuations” as market conditions turned sour.
As rumors began spreading and speculations about the venture firm being unable to meet a margin call, 3AC began moving crypto assets to pad up their funds.
In the face of potential insolvency, many sources revealed the company’s stance on trading losses. Colin Wu, a crypto reporter, said that Three Arrows Capital lost $31.37 million through trading on Bitfinex in May 2022.
Fatman, a Terra community whistleblower, revealed that 3AC purchased 10.9 million locked LUNC. The purchase price- of $559.6 million was worth $670.45 in June.
The hedge fund had also faced a slew of licensing and regulatory issues in June due to several breaches, including misleading information.
3AC AWOL After Declaring Bankruptcy
The Singapore-based company, Three Arrow Capital, declared bankruptcy in July this year, filing for Chapter 15 bankruptcy protection from U.S. creditors in the Southern District of New York.
Shortly after, their assets were wiped out due to the crypto market crash and Terra’s (USDT) colossal blockchain collapse.
As of March, the company had been handling assets worth $10 billion and received a court order in the British Virgin Islands to liquidate to pay back teeming debts.
In response, the founders of Three Arrow Capital (3AC) went on the run. A visit from the fund’s liquidators in late June to meet with the founders made the office “vacant except for several inactive computer screens.”
According to the persons who arrived at 3AC’s Singapore office, the office was locked, but they could see unopened mails, which looked like it had been pushed under the door, as the only attempt to deliver them.
During an interview with Bloomberg held at an “undisclosed location” in July 2022, the founders were said to have discussed moving plans to the United Arab Emirates. Neither David nor Zhu have been sighted as of 8 July 2022.
Three Arrows Capital Liquidators Seize Assets Worth $40 Million
Liquidators assigned to the Three Arrows case have managed to recover $40 million- a tiny fraction of what creditors claim the hedge fund owes them, which is around $3 million.
The fund’s assets mainly consist of bank accounts, cryptocurrencies, nonfungible tokens, and stakes in digital-asset firms.
Teneo’s Russell Crumpler, who was tasked with helping to facilitate the bankruptcy process, explained that 3AC’s assets stood at risk of disappearing without a trace since the majority were NFTs and cryptocurrencies.
He also declared that the founders still possessed or controlled “certain digital assets and bank accounts.”
SEC and CFTC Probing
The Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) probe are likely to result in monetary fines and other penalties for the company.
Although, the unknown whereabouts of Davies and Zhu might prove to be an obstacle to the outcome.
Celsius Network Probed By Canadian Regulators
The cryptocurrency lender Celsius network is another on the list of firms that folded and declared bankruptcy due to the market crash.
The Canadian and U.S. regulatory bodies scrutinized the crypto company in a joint investigation to uncover how Celsius’ collapse and subsequent bankruptcy have affected investors.
