Three Arrows Capital: co-founder charged with contempt of court

Three Arrows Capital (3AC) is the crypto fund that failed in June last year. 

The fund had up to $10 billion in assets under management, but after the collapse of the crypto markets following the implosion of the Earth/Moon ecosystem, it no longer had enough funds to repay all its creditors. 

The founder of 3AC was Zu Shu, who in recent days returned to discussing the matter on Twitter quoting Kyle Davies: 

The co-founder of Three Arrows Capital

Kyle Davies was the co-founder of Three Arrows Capital together with Zu Shu, and today together with Shu he works on the OPNX project.

3AC is now in the hands of bankruptcy trustees, who recently filed documentation with the New York court that would result in an explicit charge of contempt of court against Kyle Davies. 

In fact, Davies was supposed to respond to a subpoena specifically to provide information about 3AC’s collapse. 

Instead, he failed to appear, ignoring the subpoena. 

The accusers’ demand is not only to judge him for contempt of court, but also to fine him $10,000 for each day he is late. 

The documentation submitted by Three Arrows Capital’s lawyers also cites the lavish lifestyle Davies leads in Bali, thanks to the substantial profits from managing the fund. 

So while 3AC squandered the money of its creditors (users and investors), the founders presumably continued to cash in well enough to afford a lavish lifestyle. 

What’s more, they are now also refusing to cooperate with authorities who are trying to find funds to pay back creditors’ money. 

It is worth noting that Judge Martin Glenn who is handling the case ordered Davies to comply with the subpoena back in March, intimidating him to appear by 13 April. 

3AC’s liquidators say he has not complied with this order, nor has he responded in any way.

However, on Twitter Davies continues to post and respond, mocking those who remind him that he should find the funds to repay creditors. 

A hearing to discuss the ‘contempt charge is scheduled to be held on 8 August. 

The bankruptcy of Three Arrows Capital

As was also the case with FTX and Alameda Research, the underlying problem was the mismanagement of user funds. 

In theory, funds deposited by users and investors on exchanges or crypto funds should be set aside, and used only to invest them with the users’ consent or as a reserve to cover all possible withdrawal requests. 

Instead, these funds were being spent by companies as if they were internal, corporate funds. Since they had raised a lot of capital from users and investors, they could afford to take large sums from them without anyone being able to suspect it. 

The problem is that when users began to demand en masse that they be allowed to withdraw their funds these were simply no longer there, because the companies had spent them as if they were their own. 

Apparently in both cases they had not only been spent, they had been squandered just to enable the founders to lead luxurious lives. 

So today Kyle Davies and Zu Shu, but also Sam Bankman-Fried and Caroline Ellison, are much richer than before, while their users are much less so. 

Simply put, a substantial portion of the users’ funds have passed into their hands, eventually in exchange for essentially nothing. 

The bankruptcy procedure

Once the bankruptcy was discharged, a court appointed bankruptcy trustees, who now have the daunting task of finding as many funds as possible to return to creditors. 

Thus the companies are now no longer in the hands of the founders, but of court-appointed bankruptcy trustees. 

It is very likely that they will not be able to find enough funds to return the full amount to all creditors, and the proceedings could take years. 

At the same time, other lawsuits are underway to establish responsibility, culpability, and possible punishment for those who caused the problem, and among them the main defendants are the founders and directors of the companies. 

While it seems extremely difficult for creditors to receive back all their funds, it is definitely more likely that those responsible will be identified and punished, although it will take some time. 

In the meantime, it is hoped that new regulations will be enacted for those who manage the crypto funds of others that will oblige them not to be able to dispose of their users’ funds at will.