$1.5 billion "black eats black": The mutual devouring of FTX and Three Arrows Capital's souls

Original author: Oliver, Mars Finance

The flames of war have reignited! On June 23rd, the FTX bankruptcy liquidation team officially dropped a bombshell in court. They completely rejected the staggering $1.53 billion claim from Three Arrows Capital (3AC), demanding the judge to "zero it out" entirely. This resounding slap in the face instantly escalated the "battle of the dead souls" that has been ongoing for several years. Two already buried crypto empires, their "ghosts" are once again clawing at each other in court, and this latest legal conflict also unveils a new chapter in the darkest and most chaotic "life of Luo" incident in the entire history of crypto.

To understand this grand play, we must first get to know the three key figures at the table, as well as the bloody storm behind them that is enough to be made into a Hollywood blockbuster.

The first one is the wild-haired SBF (Sam Bankman-Fried), the creator of the FTX empire. Before the massive collapse in 2022, he was a god in the crypto world, a "white knight" in the eyes of countless believers. The media compared him to J.P. Morgan, and politicians regarded him as a guest of honor. Sporting a messy hairstyle, wearing shorts and a T-shirt, he projected the image of a disheveled genius, claiming to save the world with cryptocurrency. However, when the empire crumbled, people realized that beneath the armor of this "knight," there was nothing; he was merely a "century fraud" sentenced to 25 years in prison.

The second is the two founders of Three Arrows Capital, Su Zhu and Kyle Davies. They are known as the "gambling kings" in the crypto space, famous for their arrogance, aggressiveness, and massive leverage of billions of dollars. Their investment philosophy, the "supercycle theory", was once regarded as a benchmark, and their every word and deed could stir up market trends. However, when the market reversed, their so-called "myth" was proven to be just a huge bubble. After the company's bankruptcy, the two staged a global escape, with one being arrested and imprisoned in Singapore, while the other continued to play the role of a "exiled noble" under the sun in Dubai.

The third person is John J. Ray III, a true tough character. The most remarkable achievement on his resume is personally handling one of the largest fraud cases in American history—the bankruptcy liquidation of Enron. When he was called in to clean up the mess at FTX, this "king of liquidation," who has seen it all, was shocked. He candidly told the court: In my more than forty years of professional career, I have never seen such a complete failure of corporate control and such a total lack of credible financial information.

The story unfolds between these three parties. In 2022, an epic tsunami triggered by the collapse of the algorithmic stablecoin Terra/LUNA swept through the entire crypto world. The luxurious cruise ship Three Arrows Capital, built on leverage and debt, was the first to hit the iceberg and sank rapidly. Shortly after, a few months later, the seemingly indestructible FTX aircraft carrier also imploded without warning, exposing a shocking scam worth billions of dollars.

Now, in the bankruptcy court of Delaware, these two giants that have already "buried" themselves are entangled in a relentless struggle over a "hellish ledger" worth up to $1.53 billion. The liquidators of Three Arrows claim that at the last moment before their sinking, FTX, like a bloodthirsty shark, launched a despicable "black on black" attack, illegally swallowing their last remaining assets. The liquidators of FTX retorted: You gamblers messed it up yourselves, and now you want to tear a piece of flesh from us, who are also victims that have been drained? No way!

Is this ultimately a shameless extortion or a delayed pursuit of justice? To unravel this "Rashomon", we must go back to that blood-soaked summer of 2022, dive into the depths, and recover those truths that have been deliberately buried.

One contract, two narratives

In court, both lawyers told completely opposing versions of the story, like two ledgers recording the same event but with entirely different contents.

FTX's ledger tells a story about "order and rules."

In this ledger, FTX is a dedicated and ruthless "platform warden." The core logic of the story is simple: Three Arrows Capital is a major client on the platform, but also a reckless gambler. When the Terra/LUNA collapse triggered a market tsunami, Three Arrows' account suffered severe losses, and its margin level fell below the safety line stipulated in the contract, constituting a clear default.

FTX claimed that they had contacted Three Arrows multiple times to request additional margin, but the other party turned a deaf ear. What’s worse is that Three Arrows not only failed to provide funds, but also withdrew $18 million worth of Ethereum from an already precarious account. From FTX's perspective, this is akin to stealing from a burning house. In response to this egregious behavior, FTX stated that their actions were entirely procedural and devoid of any biased risk management. They forcibly liquidated some of Three Arrows' assets according to the agreement, to prevent its account from going negative, thereby protecting the interests of the platform and other innocent customers.

Under the leadership of John Ray III, the "King of Liquidation," the FTX legal team appeared confident. They emphasized to the court that FTX's creditors should not, and cannot, become the "suckers" of the failed trades of Three Arrows Capital. Their narrative painted FTX as a "responsible gatekeeper" protecting everyone in the storm.

The ledger of Three Arrows Capital tells a story about "conspiracy and pursuit."

This account begins from a pile of ruins. When the liquidators of Three Arrows were tasked with taking over the company, they found that hard drives had been dismantled, computers were missing, and it was nearly impossible to find any useful records. The founders, Su Zhu and Kyle, were extremely uncooperative, making the liquidation process as difficult as climbing to the sky.

In a state of information vacuum, the liquidators could initially only submit a $120 million "placeholder" claim to FTX based on scattered clues. However, after navigating through numerous obstacles in the legal process, they finally obtained a massive amount of original trading data from FTX, revealing an astonishing picture. They found that in the mere two days during which FTX claimed that Three Arrows defaulted and liquidated, assets worth up to $1.53 billion in the Three Arrows account had almost been "raided clean."

This discovery completely changed the direction of the story. The liquidator of Three Arrows immediately applied to the court to increase the claim amount from 120 million to 1.53 billion. FTX strongly opposed this, arguing that it was unreasonable. However, the presiding judge made a key ruling: he believed that Three Arrows delayed amending the claim largely due to FTX's own actions, as FTX repeatedly delayed providing critical data.

This judicial determination provides strong official endorsement for Three Arrows' "conspiracy theory." If FTX's liquidation operations were truly as open and procedurally just as they claim, why would they need to obstruct and delay providing trading data? Unless, behind this ledger, there are deeper, darker secrets.

The Core of the Scam: Alameda's Distress Signal

To unravel this mystery, we must tear off the mask of SBF as the "white knight" and see what kind of fatal implosion was happening at the heart of his own empire in June 2022, when he postured as a savior pointing the way.

The key witness is SBF's ex-girlfriend, the secret head of his "shadow empire" Alameda Research - Caroline Ellison.

In a subsequent criminal trial of SBF, Caroline, as a key witness, revealed a shocking secret to the world. She confirmed that just in the same week that FTX, with righteous indignation, "raided" Three Arrows Capital under the pretext of "insufficient margin," her company Alameda also suffered catastrophic losses due to the collapse of Terra, resulting in a multi-billion dollar hole on its balance sheet. Major lenders called in frantically to collect debts, like sharks smelling blood.

Alameda is about to collapse. What to do? Caroline trembled in court as she revealed the answer: It was SBF who instructed me to commit these crimes. He had her open a "secret backdoor" to "borrow" billions of dollars from FTX's customer funds to repay Alameda's loans.

This testimony was like a flash of lightning, instantly illuminating the dark core of the entire event. It turns out that while FTX played the role of the "cold-hearted warden," its "son" Alameda was secretly and illegally receiving an "infinite transfusion" from FTX customer funds due to a similar but much larger funding gap.

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

A report from blockchain analysis company Nansen shows that during the collapse of Three Arrows in mid-June 2022, Alameda sent approximately $4 billion worth of FTT tokens to FTX's wallet address. FTT is the platform token issued by FTX, and its value is entirely supported by FTX itself. This operation is akin to using "happy beans" printed in their own backyard, which have almost no real liquidity, as collateral to exchange for the real gold and silver deposited by customers in the FTX treasury.

Now, looking back at SBF's public performance at that time, it was simply Oscar-worthy. While he was crazily misappropriating client funds behind the scenes, he was in front of the camera accepting interviews from media outlets like Forbes, casually stating that we are willing to make some bad deals if that is the necessary cost to stabilize the situation and protect our clients.

This generous rhetoric, when heard today, is filled with great irony. He is not a stable participant reaching out to help, but rather a bankrupt, hollow fraud. His so-called "rescue" was merely to prevent the dominoes from falling further, thereby exposing himself as the biggest hole.

When we piece these fragments together, the statement from the Three Arrows founders that "SBF hunted us down" no longer seems unfounded. For FTX/Alameda, which had already fallen into desperate struggles by June 2022, the motivation to liquidate large leveraged trading counterparts like Three Arrows could not be clearer: first, it was to "kill and seize goods," to immediately obtain the much-needed liquidity to fill their own holes; second, it was to "kill the chicken to scare the monkey," by eliminating a huge source of risk in the market to stabilize people's minds and cover up the truth that they themselves were already suffering from "internal injuries."

They are not following the rules; they are like a drowning person, desperately pulling another person beside them just to catch a breath.

The Ghost of Lehman Brothers

Placing this dispute in a larger historical context, we find that its pattern is not new. Stripping away the technical jargon and code that envelop cryptocurrency, its core is merely a rehash of the 2008 financial crisis, a "recurrence" of the story of the collapse of Lehman Brothers.

The original sin of the two crises is the same: the failure to isolate customer assets.

This is the most untouchable red line in the financial world. Whether it is the traditional banks of a hundred years ago or today's digital currency exchanges, the clients' money is the clients' money, and the platform has no right to use it. However, after the bankruptcy of Lehman Brothers, it was found that they had "shocking negligence" and "staggering violations" in the isolation of client funds. The entire fraud system of FTX was directly built on the mixing of client assets with Alameda's proprietary trading funds. This represents a catastrophic transfer of risk, turning clients from asset owners into unsecured creditors of the platform.

The outcome of the two crises is the same: a prolonged and chaotic reckoning.

The bankruptcy of Lehman Brothers involved over a trillion dollars in debt and subsidiaries spread across the globe, and its unwinding process took years. Today, FTX's liquidator, John Ray III, is facing a similarly challenging situation. An opaque corporate structure, missing financial records, and hard-to-value digital assets... all of these make the liquidation process extremely difficult.

History does not simply repeat itself, but it does rhyme with similar endings. The saga of FTX and Three Arrows is not a unique "crypto" issue, but rather a classic tale of financial arrogance, regulatory failure, and human greed, only dressed in a trendy new outfit named "Web3."

The Ending Without Heroes

So, what is the truth behind the $1.5 billion "Hell Ledger" dispute?

The truth is that this is not a contractual lawsuit about "who breached the contract," but rather a blatant "survival game of black eating black." Three Arrows Capital, of course, is a greedy, reckless, and ultimately self-destructive "super gambler," and its downfall is self-inflicted. However, FTX is by no means an innocent platform that operates by the rules. It is a "fraudster" that has already undergone malignant transformation, yet disguises itself as healthy by "sacrificing" another opponent.

A dying gambler encounters a disguised con artist. In that lawless place, governed only by the law of the jungle, they enact the final bloody struggle.

The final ruling of the Delaware court may set some rules for future cryptocurrency bankruptcy cases. However, for this young industry that desires to disrupt traditional finance, history has already written the verdict: when a system lacks strong regulation and transparent records, and when the slogan of "trustlessness" ultimately devolves into blind worship of a few "big shots," 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 Three Arrows is merely a "crypto version" of countless greed stories on Wall Street over the past century.