FTX fights back against 3AC’s ‘unreasonable and unsupportable’ $1.53B claim

FTX’s bankruptcy lawyers have pushed back forcefully against a $1.53 billion claim filed by failed crypto hedge fund Three Arrows Capital (3AC), calling the demand “illogical” and warning that it would unfairly drain funds from FTX’s legitimate creditors.

In new court documents submitted on June 20, FTX’s legal team asked a Delaware bankruptcy judge to reject 3AC’s entire claim, arguing the trading firm’s alleged losses were self-inflicted through excessive risk-taking and ignored margin calls, not due to any misconduct by FTX.

Breaching margin requirements

The dispute centers on margin trades that 3AC placed on FTX’s exchange in 2022. At the time, 3AC, which had borrowed heavily across the crypto sector, tapped a $120 million credit facility from FTX to fund large positions.

According to FTX, the hedge fund breached margin requirements in June 2022 after the TerraUSD stablecoin collapse triggered a wider market meltdown.

The exchange added that when it notified 3AC that its account had fallen below required collateral thresholds, the firm allegedly failed to respond for more than six hours and instead withdrew $18 million worth of Ethereum (ETH), further worsening the shortfall, according to the filing.

Faced with what it called an urgent credit breach, FTX liquidated 3AC’s account, recovering $82 million. FTX’s attorneys maintain this liquidation was not only contractually allowed but also prevented an even larger hole in the estate’s balance sheet.

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.”

‘Unreasonable premise’

The filing accused 3AC of using “an unreasonable and unsupportable starting premise” to inflate its original $120 million claim more than 10x.

To support its position, FTX submitted testimony from Steven P. Coverick, managing director at consulting firm Alvarez & Marsal, who reconstructed the trades in question and concluded the forced sale was justified and necessary to stem 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 claw back billions is a bid to plug its own failed liquidation process and shift blame to FTX’s remaining creditors, who are still waiting to be repaid after the exchange’s collapse 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 clash marks the latest twist in the multi-billion dollar tangle 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 on Saturday.

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