According to Bloomberg, the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) are investigating whether bankrupt crypto hedge fund Three Arrows Capital violated rules by defrauding investors about its financial statements and failing to register with the two regulatory agencies.
According to the report, the investigation is likely to result in monetary fines and other penalties for the company and individuals involved.
The CFTC did not respond immediately to a request for comment on the report.
Three Arrows, which was once one of the industry’s most prominent firms, declared bankruptcy in July, following a broad sell-off in digital assets fueled in part by the Terra blockchain’s failure. Teneo, the advisory firm a British Virgin Islands court assigned to liquidate the now-bankrupt hedge fund, declined to comment.
Terra Collapse Shakes Up Industry
Three Arrows had a few billion dollars under management at its peak, making it a major player in the crypto world. It was known for its bullish stance, receiving loans from firms across the industry, and being a venture investor in some of the industry’s most well-known startups.
However, the firm suffered losses on its investment in the Terra blockchain project, which came crashing down in May when the so-called algorithmic stablecoin TerraUSD collapsed. As the token’s demise spread across the broader crypto market in the following weeks, Three Arrows could not meet margin calls from its lenders and defaulted on a loan from Voyager Digital. The organization was ordered to liquidate assets on June 29. On July 1, Three Arrows Capital declared insolvency.
The Terra crash caused unanticipated financial difficulties not only for Three Arrows Capital but also for other industry giants in the crypto space, including now-bankrupt lenders Celsius and Voyager.
The CFTC and the SEC are just some of the regulatory agencies cracking down on Three Arrows. The Monetary Authority of Singapore alleged in a filing that the hedge fund failed to verify that the information provided to it was not false or misleading, did not inform it of any changes to directorships and shareholdings, and committed a prolonged breach of its Assets Under Management threshold.
Three Arrows Capital Founders’ Whereabouts Unknown
With the whereabouts of Three Arrows co-founders Su Zhu and Kyle Davies unknown and the liquidators and their attorneys unable to locate them, the liquidators recently asked the court to allow them to serve the two subpoenas via their email addresses, Twitter accounts and email addresses of their attorneys.
Liquidators are seeking access to documents related to Three Arrows accounts, cryptocurrency wallets, and other assets, which they say are critical to their investigation. According to court documents, they also want to question Zhu and Davies under oath.
In court papers, liquidators also stated that they have not received “acceptable cooperation” from the founders and that the two are concealing their whereabouts while providing investigators with an incomplete list of bank accounts and firm assets.
Liquidator Russell Crumpler stated, “The founders’ refusal to offer forthright cooperation has hindered our ability to perform our duties.”
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