All you need to know from the 1,157-page 3AC affidavit
We’ve already discussed the 3AC saga in previous articles. There have been numerous rumors about the major incident. According to the information I have now, most creditors believed things were normal until early June.
It is worth noting that, following the collapse of Luna, several lenders inquired about Luna’s exposure, but 3AC assured everyone that there was nothing to worry about. They even went so far as to raise interest rates on loans in order to keep them from being called.
The firm had net assets of $703 million by the end of 2020; it’s also worth noting that it had $1.8 billion in loans outstanding at the time.
According to the documents, the firm’s net assets under management reached $3 billion in April 2022. Notably, 3AC had $600mm in LUNA/UST exposure prior to May 9th, 2022, and this is what pushed them over the edge.
They then attempted to pitch new opportunities to investors, unaware that this was merely a last resort to save the already bankrupt company.
The straw that broke the camel’s back was when the 3AC’s account called ‘mobyDck’, was margin called by the Crypto options broker (Deribit). Davies then tried to arrange a new loan from Genesis to pay the margin call, but they weren’t so fortunate this time. Genesis was more interested in them paying $355mm in additional collateral.
This margin call was the catalyst that accelerated the fund’s demise. And by this time, the rumors had already begun circulating on Twitter, telegram, and discord group chats.
Finally, after years of making a series of large directional trades, and borrowing from ~20 large institutions, Three Arrows Capital (3ac) went bust. By June ending, 3AC’s insolvency was widely reported and the entire crypto markets began to react to the news. The founders ran, and the loan defaults led to mass contagion in crypto. We can see this in Celsius asset filing where outlined their loan liability which 3AC was a major part of.
Though the 3AC founders Su Zhu and Kyle Davies were nowhere to be seen, legal proceedings moved forward.
But recently, a court document was leaked.
This document contains very important information that every crypto user should know.
3AC was based in Singapore and this document is a filing in the Singapore High Court for recognition of the BVI liquidation proceedings. It basically means that the Singapore Government is asking them to recognize liquidation proceedings and cooperate with liquidators.
This filing is voluminous. It has over 1000 pages, as it attaches other court filings which in turn attach other court filings etc.
While I don’t have much legal background to speculate on the case, there are lots of interesting bits of information to be gathered from the legal document.
While most of it is affidavits from disgruntled creditors, there are some interesting points there. We’ll take a look at;
- The yacht and the House
- Why 3AC went bust: The Borrow loop
- 3AC’s uncooperativeness
- Creditors
- The third arrow in 3AC: Tai Ping Shan
A. The yacht and the House
We can’t even begin to discuss why 3AC went bankrupt without first discussing their now-infamous yacht.
Between Sep 20 and June 22, Zhu bought two expensive bungalows in Singapore and a yacht yet to be delivered. This yacht appears in the liquidators’ application as well as prominently featured in blockchain.com’s affidavit.
Su and Kyle, 3AC’s co-founders, were extremely proud of this yacht and intended for it to be larger than any yacht owned by Singapore’s richest billionaires. But there’s a strange, almost sadistic twist to it.
They borrowed money to buy the yacht and used it as proof of 3AC’s creditworthiness whenever they needed money from lenders.
It is important to note that there were some very suspicious ETH and stablecoin movements just before 3AC was widely known to be insolvent. According to the affidavit provided by Blockchain.com, the 3AC co-founders were able to make the down payment for the yacht while ignoring an outstanding loan payment. This seems to explain the suspicious money movements.
The strangest part is that they had already begun flexing the yacht despite the fact that it was not due for another two months.
B. Why 3AC went bust: The Borrow loop
Remember we earlier made mention of the whole LUNA-UST drama right?
Now, taking a look at the leaked documents, we know for sure, that the Terra collapse completely destroyed 3AC. Their exposure was about 600m USD. That’s huge!
But despite this, 3AC still kept lying to their investors (and the market) as to the extent of their exposure. They kept assuring their investors that they weren’t rekt by Terra and that they were fine.
It appears that these lenders simply did not do their homework. As an example, consider Blockchain.com:
When asked to ‘keep them informed’ if their leverage exceeded 1.5x, Davies (a 3AC co-founder) signed the letter below, confirming over $2.3 billion in TAM.
And when they asked if 3AC could pay back the loan, the response was, “Yo uh hmm.”
C. 3AC’s uncooperativeness
With liquidators now involved, a lot of people are expecting a mass sell-off of assets owned by 3AC. Equity and token agreements in 3ACs illiquid investments would also be affected. It’s also possible that 3AC’s VC investments could negatively affect projects as token unlocks get sold off by liquidators.
Kyle and Su have also been accused of refusing to cooperate by liquidators. They cited a few dubious transactions:
- Moved stables 31.6m to Tai Ping Shan (more on this subject later)
- Transferred over 10,000 Eth from FTX to Aave
- Transferred 10.9m in stables to an unknown address.
They scheduled an ‘introductory call’ with Kyle and Su, who both showed up. However, their video and audio were both off. They were on mute and said nothing despite being bombarded with questions. Liquidators also requested access to the Singapore office, which had been locked and abandoned.
Their lawyers also stated that Su Zhu and Kyle Davies’ radio silence was due to alleged threats directed at their families. Then, when the Liquidators requested documents, the 3AC lawyers claimed that their Singapore office only served the management company. However, Liquidators persisted, claiming that the management company would undoubtedly receive documents for 3AC.
After some time, the law firm accepted the point made by the Liquidators but still didn’t provide access.
D. Creditors:
As of writing this article, it has been established that 3AC owes over $3b, with their biggest creditor being Genesis. They owe Genesis a whooping sum of $2.3b
It’s difficult to imagine Genesis, a subsidiary of Digital Currency Group that owns Grayscale (and the other companies listed below), being content with a $2.3 billion loss. But so far, they appear to be solvent.
Like we said in our earlier articles, the 3AC blowup, caused a lot of contagions. Their default on debts contributed to the insolvency of Celsius and Voyager Digital. Below, are some of the creditor claims:
Right now, it’s a bit hard to know if hard to say if all of 3AC’s assets have been liquidated. But we surely know that most of 3AC’s public on-chain assets have been liquidated.
3AC public wallets:
- 0x82ac5170a837f6554d518c71c0590723437e6b64
- 0x4862733b5fddfd35f35ea8ccf08f5045e57388b3
3AC NFT Wallet:
- 0x2e675eeae4747c248bfddbafaa3a8a2fdddaa44b
E. The third arrow in 3AC: Tai Ping Shan
In this document, the mystery of Tai Ping Shan was finally solved.
This document reveals that Tai Ping Chen Limited is a Caymans entity owned indirectly by Su Zhu and Kyle Davies’ partner, Kelly Chen (as majority shareholders).
The Business Structure:
This entity was recently transferred $31m in stablecoins by a 3AC account.
To be fair, this entity is still clouded in mystery. Its full operation is still unknown despite it being previously featured in some news outlets. Coindesk did an article on TPS Capital — the Singapore registered subsidiary owned by Tai Ping Shan Limited and Three Lucky Charms Ltd.
TPS Capital was apparently 3AC’s OTC trading desk, but what Tai Ping Shan Limited (the Cayman parent company) does is unknown. Is it just a shell company? Who are these investors? And, most importantly, why the hell did 3AC send over 31 million to Tai Ping Shan Limited when everything went wrong?
By the way, this isn’t the ‘OTC trading desk’ they sent it to; it’s to the parent company, which they own 52 percent of (with 48 percent owned by these individuals we are unfamiliar with). Looking through the filings, Tai Ping Shan appears in only one document — a Mirana demand.
And here’s the interesting part: under a Master Loan Agreement, 3AC was the GUARANTOR for Tai Ping Shan Limited’s obligations to Mirana.
Why was 3AC guaranteeing TPS Limited’s loan? Again, this isn’t the OTC desk; it’s the parent who owns a portion of the OTC desk!
What about the 31 million or so sent to Tai Ping Shan Limited? Nobody knows where it is or how it got there. It is surely a convoluted structure and would surely cause liquidators some sweat to determine Tai Ping Shan’s relationship with 3AC and its founders.
Conclusion:
3AC not only created this borrow loop, but they were also deceptive in their dealings. Furthermore, Kyle and Su put 3AC into liquidation without informing any of the shareholders or creditors and then disappeared until July 6, 2022.
They lied to lenders about the extent of their losses, their leverage and directional market exposure, and the movement of funds, and they failed to disclose their liquidation to shareholders/creditors.
It is all mind-boggling!
All of these are serious criminal cases that have the potential to make these co-founders fugitives for life. We can only hope that they cooperate fully with the authorities and make their creditors whole.
This is also a wake-up call for all crypto traders/investors. Having a huge fund doesn’t really mean you know what you’re doing. Know when to cut your losses and move on. Don’t overleverage and keep your business deals straight.
Concerning contagion risks, we believe Celsius, miners, and the Mt Gox BTC unlock are the only remaining forced selling catalysts. Even if this is the case, equities and risk assets are still subject to broader macro risks. All of this should be taken into account before making any decisions.
May the force be with us all.
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