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3AC May Have Fabricated Documents to Ease Creditors’ Concerns

3ac mislead blockchain.com to believe it was solvent

Court documents associated with the liquidation of Three Arrows Capital (3AC) in the British Virgin Islands revealed very interesting information in regards to what went down during the weeks that preceded the collapse of the Singaporean hedge fund.

In this lengthy document, the parties that initially supported and claimed the liquidation of the investment fund had to share their side of the story and that includes Charles McGarraugh, the Chief Strategy Officer of Blockchain.com.

Blockchain.com Had a Good Relationship with 3AC Before the Collapse of Terra

According to McGarraugh’s affidavit, it appears that 3AC at some point fabricated various financial reports that sought to ease creditors’ concerns in regards to the fund’s solvency shortly after the notorious collapse of the Terra ecosystem and its flagship tokens LUNA and UST.

McGarraugh first stated that Blockchain Access – the parent company of the pure-play crypto exchange – loaned money to 3AC in June 2019 in the form of a Master Loan Agreement (MLA) – a credit instrument that allowed the borrower to withdraw or use the funds as needed.

Blockchain.com’s top executive further commented that the total dealings with the Asian fund amounted to $2 billion worth of cryptocurrencies and fiat currency in the four years that the company had a business relationship with them.

Under the MLA agreement, which Blockchain Access provides a copy of, 3AC was obligated to provide periodical financial reports that include metrics such as the fund’s net asset value (NAV) and leverage – estimated as the firm’s total debt divided by its equity.

The contract also obligated 3AC to inform Blockchain Access if its leverage ratio ever exceeded 1.5x and if it ever experienced trading losses of over 4% of its equity.

On 11 May 2022, reports started to surface in regards to 3AC’s exposure to Luna (now known as Luna Classic), with estimations ranging from $200 million and $600 million being invested by the crypto hedge fund days or weeks before the collapse of the Terra ecosystem.

Questioned about this particular matter, an employee from Three Arrows Capital identified in the court document as Edward Zhao said to a Blockchain Access representative that the firm’s exposure to the Terra tokens was “not that big as part of the portfolio holdings”. Several reports name Zhao as the Chief Operating Officer of Three Arrows Capital.

As a result, Zhao emphasized that the impact of the LUNA and UST debacle on Terra’s finance was mild. The next day after that conversation took place, both tokens lost over 99% of their value.

The day after these events, the same representative from Blockchain Access once again contacted Three Arrows Capital to assess the fund’s financial situation following the implosion of Terra and he was assured that the firm’s leverage was “meaningfully below 1x”, which meant that the company met the requirements of the MLA.

Kyle Davies, the founder of 3AC, later on sent a report that confirmed that the fund had a net asset value of $2,387,000,000. McGarraugh states that he is now “doubtful that this NAV statement was accurate”.

Davies assured Blockchain Access on many other occasions that the hedge fund was doing fine and provided informal updates on the leverage ratios and NAV. He also confirmed that the fund lost around $200 million in LUNA but that those losses were already considered in the current NAV estimation.

3AC Threatens to Boycott Blockchain.com

It appears that Blockchain.com blindly trusted Davies’s word and did not ask for an audited statement that confirmed the accuracy of the information he was providing.

Later in May and following a sharp decline in the value of Bitcoin (BTC), the Blockchain Access team started to realize that the information provided by 3AC was inconsistent with the overall state of the market.

However, the staff informed McGarraugh that officials from the Singaporean hedge fund threatened to boycott the crypto exchange and its future business if they issued a margin call.

In mid-June that reports started to surface in the media about several exchanges demanding the repayment of 3AC’s loans and margin-calling the firm. By then, Blockchain Access realized that the company’s officials may have misled them to believe that the hedge fund was in good shape and this prompted the team to initiate a margin call that led to an Event of Default.

McGarraugh concludes by stating: “It is my belief that 3AC’s willingness to continue to borrow while it is heavily insolvent whilst making apparent misrepresentations and threats suggests its management cannot be trusted to retain any remaining assets for the benefit of creditors like Blockchain.com”.

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