$1.5 billion black eats black: FTX and Three Arrows Capital devour each other

Original author: Oliver, Mars Finance

The war is reignited! On June 23, the FTX bankruptcy liquidation team officially dropped a bombshell in court. They completely rejected the huge claim of $1.53 billion from Three Arrows Capital (3AC) and asked the judge to completely clear it. This loud slap in the face instantly escalated the battle of the dead that has lasted for several years. The ghosts of the two buried kripto empires once again tore each other apart in court, and this latest legal conflict also opened a new prelude to the darkest and most chaotic Luo Shengming incident in the entire history of crypto.

To understand this drama, we must first understand the three key figures at the poker table and the bloody story behind them that is enough to be made into a Hollywood blockbuster.

The first one is Sam Bankman-Fried (SBF), the founder of the FTX empire. Before the great avalanche in 2022, he was the god of the crypto world and the white knight in the eyes of countless believers. The media compared him to JP Morgan, and politicians regarded him as a guest of honor. With a messy hair, shorts and a T-shirt, he claimed to save the world with cryptocurrency in an unkempt genius image. However, when the empire collapsed, people found that there was nothing under the armor of this knight. He was just a big swindler of the century sentenced to 25 years in prison.

The second is the two founders of Three Arrows Capital (3AC), Su Zhu and Kyle Davies. They are the gamblers in the cryptocurrency circle, known for their arrogance, radicalism and huge leverage of tens of billions of dollars. Their investment philosophy super cycle theory was once regarded as a criterion, and their every word and action could stir up the market. But when the market reversed, their so-called myth proved to be just a huge bubble. After the company went bankrupt, the two staged a global escape. One was arrested and imprisoned in Singapore, and the other continued to play the role of exiled aristocrats in the sunshine of Dubai.

The third person is John J. Ray III, a real tough guy. The most shining thing on his resume is that he personally handled the bankruptcy liquidation of Enron, one of the largest fraud cases in American history. When he was invited to clean up the mess of FTX, this liquidation king who was used to big scenes was shocked. He told the court bluntly: In my more than 40 years of career, I have never seen such a complete failure of corporate control and such a complete lack of credible financial information.

The story happened between these three parties. In 2022, an epic tsunami caused by the collapse of the algorithmic stablecoin Terra/LUNA swept the entire crypto world. The luxury cruise ship of Three Arrows Capital, built with leverage and debt, was the first to hit the iceberg and sank quickly. Then, a few months later, the seemingly indestructible FTX aircraft carrier also imploded without warning, exposing a shocking scam of tens of billions of dollars.

Now, in the bankruptcy court of Delaware, the ghosts of these two giants who have been buried are fighting for a hell account book of up to $1.53 billion. The liquidator of Three Arrows claimed that in the last moment before Three Arrows sank, FTX, like a bloodthirsty shark, carried out a despicable black-eating-black against them and illegally swallowed up their last belongings. The liquidator of FTX retorted: You gamblers have messed up yourselves, and you still want to take a piece of meat from us, the victims who have also been emptied? No way!

Is this a shameless blackmail or a belated pursuit of justice? To solve this Rashomon, we must go back to the bloody summer of 2022, dive into the deep sea, and salvage the truth that has been deliberately buried.

One contract, two narratives

In court, lawyers on both sides told completely opposing versions of the story, like two account books recording the same event but with very different contents.

FTXs ledger records a story about order and rules.

In this account, FTX is a platform warden who is conscientious and unfaithful to his relatives. The core logic of the story is simple: Three Arrows Capital is a big customer on the platform, but also an unruly high-roller. When the collapse of Terra/LUNA triggered a market tsunami, Three Arrows account suffered heavy losses, and its margin level fell below the safety line stipulated in the contract, constituting a clear breach of contract.

FTX claimed that they contacted Three Arrows several times to request additional margin, but the other party turned a deaf ear. Whats more, instead of replenishing the money, Three Arrows reversed and withdrew $18 million worth of Ethereum from the already precarious account. In FTXs view, this is tantamount to stealing from a burning house. Faced with such bad behavior, FTX stated that its actions were completely programmatic and unbiased risk management. According to the agreement, they forced the liquidation of some of Three Arrows assets to prevent its account from going negative, thereby damaging the interests of the platform and other innocent customers.

Under the leadership of John Ray III, the King of Liquidation, FTXs legal team seemed justified. They emphasized to the court that FTXs creditors should not and could not become the takers of Three Arrows Capitals failed transactions. Their narrative portrayed FTX as a responsible gatekeeper who protected everyone in the storm.

The account books of Three Arrows Capital tell a story about conspiracy and pursuit.

This account started from a ruin. When the liquidators of Sanjian were ordered to take over the company, they found that the hard drives in the office had been dismantled, the computers were missing, and there were almost no useful records. The founders Su Zhu and Kyle were extremely uncooperative, making the liquidation work extremely difficult.

In the state of information vacuum, the liquidator could only submit a placeholder claim of $120 million to FTX based on scattered clues. However, when they finally got a large amount of raw transaction data from FTX through legal procedures and many obstacles, an astonishing picture emerged. They found that in the short two days when FTX claimed that Three Arrows had defaulted and closed its positions, the assets worth up to $1.53 billion in Three Arrows accounts were almost looted.

This discovery completely changed the course of the story. The liquidator of Three Arrows immediately applied to the court to increase the amount of the claim from 120 million to 1.53 billion. FTX, of course, strongly opposed it, believing that this was unreasonable. But the presiding judge made a key ruling: He believed that the reason why Three Arrows modified the claim so late was largely due to FTX itself, because FTX repeatedly delayed in providing key data.

This judicial determination provides strong official endorsement for the conspiracy theory of the Three Arrows. If FTXs liquidation operation is really as fair and just as it claims, why would it obstruct and delay the provision of transaction data? Unless, behind this ledger, there are deeper and darker secrets.

The heart of the scam: Alamedas distress signal

To solve this mystery, we must tear off SBFs mask of white knight and see what kind of fatal implosion is happening in the heart of his own empire in June 2022 when he is pointing the finger at the world with the attitude of a savior.

The key witness is Caroline Ellison, SBF’s ex-girlfriend and the head of his secret “shadow empire” Alameda Research.

Later, in SBFs criminal trial, Caroline, as a tainted witness, revealed a shocking secret to the world. She confirmed that in the same week that FTX righteously confiscated Three Arrows Capital on the grounds of insufficient margin, her company Alameda also suffered catastrophic losses due to the collapse of Terra, with a huge hole of billions of dollars on its balance sheet. Major lenders, like sharks smelling blood, frantically called to collect loans.

Alameda was about to collapse. What to do? Caroline trembled in court and gave the answer: SBF instructed me to commit these crimes. He asked her to open a secret back door and borrow billions of dollars from FTXs customer funds to repay Alamedas loan.

This testimony was like a flash of lightning, instantly illuminating the dark core of the entire incident. It turned out that while FTX was playing the role of the cold warden, its son Alameda was secretly and illegally accepting unlimited transfusions from FTX customer funds because of a funding gap of the same nature but much larger in scale.

The data on the chain provides cold, hard evidence for this lie.

According to a report by blockchain analysis company Nansen, during the collapse of the Three Arrows in mid-June 2022, Alameda sent FTT tokens worth about $4 billion to FTXs wallet address. FTT is a platform coin issued by FTX itself, and its value is fully supported by FTX itself. This operation is tantamount to using Happy Beans printed in its own backyard with almost no real liquidity as collateral to exchange for real money deposited by customers in the FTX vault.

Now, if we look back at SBFs public performance at the time, it was simply Oscar-level. While he was frantically misappropriating customer funds behind the scenes, he was interviewed by Forbes and other media on stage, lightly declaring that we are willing to make a somewhat bad deal if this is the price necessary to stabilize the situation and protect customers.

This impassioned speech now sounds full of great irony. He was not a steady participant who offered a helping hand, but a liar who was insolvent and strong on the outside but weak on the inside. His so-called rescue was just to prevent the dominoes from falling further, thus exposing himself as the biggest hole.

When we piece these fragments together, the SBF hunted us rhetoric of the founder of Three Arrows no longer seems groundless. For FTX/Alameda, which was already in desperate struggle in June 2022, the motives for liquidating large, highly leveraged counterparties like Three Arrows could not be clearer: first, it is to kill and rob and immediately obtain much-needed liquidity to fill its own holes; second, it is to kill the chicken to scare the monkey, by killing a huge source of risk in the market, to stabilize peoples hearts and cover up the fact that they have actually been internally injured.

They are not enforcing the rules, but like a drowning person, desperately pulling at another person beside them just to get a second breath.

The Ghost of Lehman Brothers

Putting this dispute into a larger historical context, we will find that its pattern is not new. Stripping away the technical coat of cryptocurrency full of terms and codes, its core is nothing more than a replica of the 2008 financial crisis and the reincarnation of the Lehman Brothers collapse story.

The original sin of both crises is the same: the failure to segregate client assets.

This is the most untouchable red line in the financial world. Whether it is a traditional bank a hundred years ago or a digital currency exchange today, the customers money is the customers money, and the platform has no right to use it. However, after Lehman Brothers went bankrupt, it was found that it had astonishing negligence and astonishing violations in segregating customer funds. And FTXs entire fraud system is directly based on mixing customer assets with Alamedas proprietary trading funds. This is a catastrophic risk transfer that turns customers from asset owners into unsecured creditors of the platform.

The outcome of both crises was the same: a protracted and messy reckoning.

Lehman Brothers bankruptcy involved trillions of dollars in debt and subsidiaries around the world, and the process of unwinding it took several years. Today, FTXs liquidator, John Ray III, is facing the same difficult situation. The opaque corporate structure, missing financial records, and difficult-to-value digital assets all make liquidation difficult.

History will not simply repeat itself, but it will rhyme with similarities. The legend of FTX and Three Arrows is not a unique crypto problem, but a classic story about financial arrogance, regulatory failure, and human greed, but with a trendy coat called Web3.

No heroic ending

So, what is the truth behind this $1.5 billion “ledger from hell” dispute?

The truth is, this is not a contract lawsuit about who breached the contract, but a naked black-eating-black survival game. Three Arrows Capital is indeed a greedy, reckless super gambler who eventually played with fire and burned himself. Its demise is its own fault. But FTX is by no means an innocent platform that plays by the rules. It is a fraudster who has become cancerous but pretends to be healthy by sacrificing another opponent.

A dying gambler met a disguised liar. In the encrypted slaughterhouse where there were no rules but only the law of the jungle, they staged the last bloody fight.

The final ruling of the Delaware court may set some rules for future crypto bankruptcy cases. But for this young industry eager to subvert traditional finance, the verdict of history has already been written: when a system lacks strong supervision and transparent records, and when the slogan of no trust eventually degenerates into blind worship of a few big guys, there are no heroes here, only predators of different faces.

Human greed and fear have never changed. The battle of the dead between FTX and San Arrow is just a cryptocurrency version of countless greed stories on Wall Street over the past century.

This article is sourced from the internet: $1.5 billion black eats black: FTX and Three Arrows Capital devour each other

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