With $1.5 billion in bad debts, how does SBF hunt down the cancerous empire behind the Three Arrows?

The war is reignited! On June 23, the FTX bankruptcy liquidation team officially dropped a bombshell in court. They completely rejected the huge claim of $1.53 billion from Three Arrows Capital (3AC) and asked the judge to completely "clear" it. This loud slap in the face instantly escalated the "battle of the dead" that has lasted for several years. The "ghosts" of the two buried crypto empires once again fought in court, and this latest legal conflict also opened a new prelude to the darkest and most chaotic "Luo Shengming" incident in the entire history of crypto.

To understand this drama, we must first understand the three key figures at the poker table and the bloody story behind them that is enough to be made into a Hollywood blockbuster.

The first one is Sam Bankman-Fried (SBF), the founder of the FTX empire. Before the avalanche in 2022, he was the god of the crypto world and the "white knight" in the eyes of countless believers. The media compared him to JP Morgan, and politicians regarded him as a guest of honor. With a messy hair, shorts and a T-shirt, he claimed to save the world with cryptocurrency in an unkempt genius image. However, when the empire collapsed, people found that there was nothing under the armor of this "knight". He was just a "big swindler of the century" sentenced to 25 years in prison.

The second is the two founders of Three Arrows Capital (3AC), Su Zhu and Kyle Davies. They are the "gamblers" in the cryptocurrency circle, known for their arrogance, radicalism and huge leverage of tens of billions of dollars. Their investment philosophy "super cycle theory" was once regarded as a criterion, and their every word and action could stir up the market. But when the market reversed, their so-called "myth" proved to be just a huge bubble. After the company went bankrupt, the two staged a global escape. One was arrested and imprisoned in Singapore, and the other continued to play the role of "exiled aristocrats" in the sunshine of Dubai.

The third person is John J. Ray III, a real tough guy. The most shining thing on his resume is that he personally handled the bankruptcy liquidation of Enron, one of the largest fraud cases in American history. When he was invited to clean up the mess of FTX, this "liquidation king" who was used to big scenes was shocked. He told the court bluntly: In my more than 40 years of career, I have never seen such a complete failure of corporate control and such a complete lack of credible financial information.

The story happened between these three parties. In 2022, an epic tsunami caused by the collapse of the algorithmic stablecoin Terra/LUNA swept the entire crypto world. The luxury cruise ship of Three Arrows Capital, built with leverage and debt, was the first to hit the iceberg and sank quickly. Then, a few months later, the seemingly indestructible FTX aircraft carrier also imploded without warning, exposing a shocking scam of tens of billions of dollars.

Now, in the bankruptcy court of Delaware, the ghosts of these two giants who have been "buried" are fighting endlessly for a "hell account book" of up to $1.53 billion. The liquidator of Three Arrows claimed that in the last moment before Three Arrows sank, FTX, like a bloodthirsty shark, carried out a despicable "black-eating-black" against them and illegally swallowed up their last belongings. The liquidator of FTX retorted: You gamblers have messed up yourselves, and you still want to take a piece of meat from us, the victims who have also been emptied? No way!

Is this a shameless extortion or a belated pursuit of justice? To solve this "Rashomon", we must go back to the bloody summer of 2022, dive into the deep sea, and salvage the truth that has been deliberately buried.

One contract, two narratives

In court, lawyers on both sides told completely opposing versions of the story, like two account books recording the same event but with very different contents.

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

In this account, FTX is a "platform warden" who is conscientious and unfaithful to his relatives. The core logic of the story is simple: Three Arrows Capital is a big customer on the platform, but also an unruly high-roller. When the collapse of Terra/LUNA triggered a market tsunami, Three Arrows' account suffered heavy losses, and its margin level fell below the safety line stipulated in the contract, constituting a clear breach of contract.

FTX claimed that they contacted Three Arrows several times to request additional margin, but the other party turned a deaf ear. What's more, instead of replenishing the money, Three Arrows reversed and withdrew $18 million worth of Ethereum from the already precarious account. In FTX's view, this is tantamount to stealing from a burning house. Faced with such bad behavior, FTX stated that its actions were completely procedural and unbiased risk management. According to the agreement, they forced the liquidation of part of Three Arrows' assets to prevent its account from going negative, thereby damaging the interests of the platform and other innocent customers.

Under the leadership of John Ray III, the "King of Liquidation", FTX's legal team seemed justified. They emphasized to the court that FTX's creditors should not and could not be the "takers" of Three Arrows Capital's failed transactions. Their narrative portrayed FTX as a "responsible gatekeeper" who protected everyone in the storm.

The account books of Three Arrows Capital tell a story about "conspiracy and pursuit."

This account started from a ruin. When the liquidators of Sanjian were ordered to take over the company, they found that the hard drives in the office had been dismantled, the computers were missing, and there were almost no useful records. The founders Su Zhu and Kyle were extremely uncooperative, making the liquidation work extremely difficult.

In the state of information vacuum, the liquidators could only submit a "placeholder" claim of $120 million to FTX based on scattered clues. However, when they finally got a large amount of original transaction data from FTX through legal procedures and overcame many obstacles, a shocking picture emerged. They found that in the short two days when FTX claimed that Three Arrows had defaulted and closed its positions, the assets worth up to $1.53 billion in Three Arrows' accounts were almost "looted".

This discovery completely changed the course of the story. The liquidator of Three Arrows immediately applied to the court to increase the amount of compensation from 120 million to 1.53 billion. FTX, of course, strongly opposed it, believing that this was unreasonable. But the presiding judge made a key ruling: He believed that the reason why Three Arrows modified the claim so late was largely due to FTX itself, because FTX repeatedly delayed in providing key data.

This judicial determination provides a strong official endorsement for the "conspiracy theory" of the Three Arrows. If FTX's liquidation operation is really as fair and just as it claims, why would it obstruct and delay the provision of transaction data? Unless, behind this ledger, there are deeper and darker secrets.

The heart of the scam: Alameda's distress signal

To solve this mystery, we must tear off SBF's mask of "white knight" and see what kind of fatal implosion is happening in the heart of his own empire in June 2022 when he is pointing the finger at the world with the attitude of a savior.

The key witness is Caroline Ellison, SBF’s ex-girlfriend and the head of his secret “shadow empire” Alameda Research.

In the subsequent criminal trial of SBF, Caroline, as a tainted witness, revealed a shocking secret to the world. She confirmed that in the same week that FTX righteously "confiscated" Three Arrows Capital on the grounds of "insufficient margin", her company Alameda also suffered catastrophic losses due to the collapse of Terra, with a huge hole of billions of dollars on its balance sheet. Major lenders, like sharks smelling blood, frantically called to collect loans.

Alameda was about to collapse. What to do? Caroline trembled in court and gave the answer: SBF instructed me to commit these crimes. He asked her to open a "secret back door" and "borrow" billions of dollars from FTX's customer funds to repay Alameda's loan.

This testimony was like a flash of lightning, instantly illuminating the dark core of the entire incident. It turned out that while FTX was playing the role of the "cold warden", its "son" Alameda was secretly and illegally accepting "unlimited transfusions" from FTX customer funds because of a funding gap of the same nature but much larger in scale.

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

According to a report by blockchain analysis company Nansen, during the collapse of the Three Arrows in mid-June 2022, Alameda sent FTT tokens worth about $4 billion to FTX's wallet address. FTT is the platform currency issued by FTX itself, and its value is fully supported by FTX itself. This operation is tantamount to using the "Happy Beans" printed in its own backyard with almost no real liquidity as collateral to exchange for the real money deposited by customers in the FTX vault.

Now, looking back at SBF's public performance at the time, it was simply Oscar-level. While he was frantically misappropriating customer funds behind the scenes, he was interviewed by Forbes and other media on stage, lightly declaring that we are willing to make a somewhat bad deal if this is the price necessary to stabilize the situation and protect customers.

This impassioned speech now sounds full of great irony. He was not a steady participant who offered a helping hand, but a liar who was insolvent and strong on the outside but weak on the inside. His so-called "rescue" was just to prevent the dominoes from falling and thus expose himself as the biggest hole.

When we piece these fragments together, the "SBF hunted us" rhetoric of the founder of Three Arrows no longer seems groundless. For FTX/Alameda, which was already in desperate struggle in June 2022, the motives for liquidating large, highly leveraged counterparties like Three Arrows could not be clearer: first, it is to "kill and rob" and immediately obtain much-needed liquidity to fill its own holes; second, it is to "kill the chicken to scare the monkey" and stabilize people's hearts by killing a huge source of risk in the market, covering up the fact that it has actually been "internally injured".

They are not enforcing the rules, but like a drowning person, desperately pulling at another person beside them just to get a second breath.

The Ghost of Lehman Brothers

Putting this dispute into a larger historical context, we will find that its pattern is not new. Stripping away the technical coat of cryptocurrency full of terms and codes, its core is nothing more than a replica of the 2008 financial crisis and the "reincarnation" of the story of the collapse of Lehman Brothers.

The original sin of both crises is the same: the failure to segregate client assets.

This is the most untouchable red line in the financial world. Whether it is a traditional bank a hundred years ago or a digital currency exchange today, the customer's money is the customer's money, and the platform has no right to use it. However, after Lehman Brothers went bankrupt, it was found that it had "astonishing negligence" and "astonishing violations" in segregating customer funds. And FTX's entire fraud system is directly based on mixing customer assets with Alameda's proprietary trading funds. This is a catastrophic risk transfer that turns customers from asset owners into unsecured creditors of the platform.

The outcome of both crises was the same: a protracted and messy reckoning.

Lehman Brothers' bankruptcy involved trillions of dollars in debt and subsidiaries around the world, and the process of unwinding it took several years. Today, FTX's liquidator, John Ray III, is facing the same difficult situation. The opaque corporate structure, missing financial records, and difficult-to-value digital assets all make liquidation difficult.

History will not simply repeat itself, but it will rhyme with similarities. The legend of FTX and Three Arrows is not a unique "crypto" issue, but a classic story about financial arrogance, regulatory failure and human greed, but it is dressed in a trendy coat called "Web3".

No heroic ending

So, what is the truth behind this $1.5 billion “Ledger of Hell” dispute?

The truth is, this is not a contract lawsuit about "who breached the contract", but a naked survival game of "black eating black". Three Arrows Capital is indeed a greedy, reckless "super gambler" who eventually played with fire and burned himself. Its demise is its own fault. But FTX is by no means an innocent platform that plays by the rules. It is a "fraudster" that has become cancerous itself, but pretends to be healthy by "sacrificing" another opponent.

A dying gambler met a disguised liar. In the encrypted slaughterhouse where there were no rules but only the law of the jungle, they staged the last bloody fight.

The final ruling of the Delaware court may set some rules for future crypto bankruptcy cases. But for this young industry eager to subvert traditional finance, the verdict of history has already been written: when a system lacks strong supervision and transparent records, and when the slogan of "no trust" eventually degenerates into blind worship of a few "big guys", 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 San Arrow is just a "cryptocurrency" version of countless greed stories on Wall Street over the past century.