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

The flames of war reignite! On June 23, the FTX bankruptcy liquidation team officially dropped a bombshell in court. They completely dismissed the massive claim of $1.53 billion from Three Arrows Capital (3AC), requesting the judge to wipe it out entirely. This loud slap in the face instantly escalated the years-long “battle of the dead souls.” Two already buried crypto empires, their “ghosts” are once again clawing at each other in court, and this latest legal conflict unveils a new chapter in the darkest and most chaotic event in crypto history, known as the “Roman Life” incident.

To understand this grand drama, we must first get to know the three key figures at the table and the bloody turmoil behind them that could be made into a Hollywood blockbuster.

The first is the frizzy-haired SBF (Sam Bankman-Fried), the creator of the FTX empire. Before the great avalanche 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 head of hair and dressed in shorts and a T-shirt, he presented himself as a disheveled genius, claiming to save the world with cryptocurrency. However, when the empire collapsed, people discovered that beneath this “knight’s” armor, 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 “gamblers” of the crypto world, famous for their arrogance, aggression, and enormous leverage of billions of dollars. Their investment philosophy, the “super cycle theory,” was once regarded as a standard, and their every word and action could stir the market. But when the market turned, their so-called “myth” was proven to be just a huge bubble. After the company went bankrupt, the two staged a global escape, one was arrested and imprisoned in Singapore, while the other continued to play the role of “exiled nobility” under the sun in Dubai.

The third individual is John J. Ray III, a true tough character. The brightest highlight 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 is accustomed to major scenarios, was shocked. He candidly told the court: In my over forty years of career, I have never seen such a complete failure of corporate controls and such a total lack of reliable financial information.

The story takes place among 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 luxury cruise ship Three Arrows Capital, built on leverage and debt, was the first to hit the iceberg and quickly sank. Shortly after, a few months later, the seemingly invincible FTX aircraft carrier also imploded without warning, exposing a shocking multi-billion dollar scam.

Now, in the bankruptcy court in Delaware, these two giants that have already “buried” themselves are entangled over a “hellish ledger” worth up to $1.53 billion. The liquidators of Three Arrows claim that at the last moment before Three Arrows sank, FTX, like a bloodthirsty shark, conducted a despicable “black eats black” scheme, illegally swallowing their last belongings. The liquidators of FTX retorted: You gamblers messed up yourselves, and now you want to tear off a piece from us, the similarly hollowed-out victims? No way!

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

A contract, two interpretations

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

The ledger of FTX tells a story about “order and rules.”

In this account, 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 it is also a reckless gambler. When the Terra/LUNA collapse triggered a market tsunami, Three Arrows’ accounts suffered significant losses, and its margin levels fell below the safety line stipulated in the contract, constituting a clear default.

FTX claimed that they contacted Three Arrows several times to request additional margin, but the other party ignored them. What’s worse, Three Arrows not only did not add funds but instead 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 the face of such misconduct, FTX stated that their actions were completely procedural and devoid of any bias in risk management. According to the agreement, they forcibly liquidated part of Three Arrows’ assets to prevent the account from going negative, thereby protecting the interests of the platform and other innocent clients.

Under the leadership of John Ray III, the “king of liquidation,” the legal team of FTX appeared quite assertive. They emphasized to the court that FTX’s creditors should not, and cannot, become the “buyers” of the failed trades of Three Arrows Capital. Their narrative portrayed FTX as a “responsible gatekeeper” protecting everyone amid the storm.

The ledger of Three Arrows Capital tells a story of “conspiracy and pursuit.”

The account began in the midst of ruins. When the liquidators of Three Arrows were instructed to take over the company, they found that hard drives had been dismantled, computers were missing, and there were almost no useful records to be found. The founders, Su Zhu and Kyle, were extremely uncooperative, making the liquidation process nearly impossible.

In a state of information vacuum, the liquidators initially could only submit a $120 million “placeholder” claim to FTX based on scattered clues. However, after going through legal procedures and overcoming numerous obstacles, they finally received a massive amount of raw trading data from FTX, revealing an astonishing picture. They found that during the brief two days when FTX claimed that Three Arrows Capital defaulted and liquidated, assets worth up to $1.53 billion in the Three Arrows account were almost entirely “raided.”

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. Of course, FTX strongly opposed this, believing it was unreasonable. However, the presiding judge made a crucial ruling: he believed that the reason Three Arrows modified the claim so late was largely due to FTX’s own actions, as FTX repeatedly delayed in providing critical data.

This judicial determination provides a strong official endorsement for the “conspiracy theory” of Three Arrows. If FTX’s liquidation operations were truly as open and 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 SBF’s “white knight” mask and see what kind of fatal implosion was occurring in the heart of his own empire in June 2022, when he was acting as a savior pointing the way.

The key witness is SBF’s ex-girlfriend, the secret “shadow empire” Alameda Research’s female leader - Caroline Ellison.

In the subsequent criminal trial of SBF, the cooperating witness Caroline revealed a shocking secret to the world. She confirmed that just in the same week FTX sternly “called out” Three Arrows Capital for “insufficient margin,” her company Alameda also suffered catastrophic losses due to the Terra collapse, with a massive hole appearing in its balance sheet worth billions of dollars. Major lenders, like sharks smelling blood, frantically called to collect loans.

Alameda is about to collapse. What should we do? Caroline trembled in court and revealed the answer: it was SBF who instructed me to commit these crimes. He made her open a “secret backdoor” to “borrow” billions of dollars from FTX’s client funds to repay Alameda’s loans.

This testimony was like a flash of lightning, instantly illuminating the dark core of the entire event. It turned out that while FTX played the role of the “cold-hearted warden”, its “darling” Alameda was secretly and illegally receiving an “infinite blood transfusion” from FTX customer funds due to a much larger funding gap of the same nature.

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

A report by 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 the wallet address of FTX. FTT is the platform token issued by FTX itself, and its value is entirely supported by FTX. This operation is akin to using “joy beans” printed from one’s own backyard, which have almost no real liquidity, as collateral to exchange for the real gold and silver deposited by clients in the FTX treasury.

Now, looking back at SBF’s public performances at that time, they were simply Oscar-level. While he was secretly misappropriating customer funds behind the scenes, he was accepting interviews from media outlets like Forbes on stage, casually claiming that we are willing to make a somewhat bad deal if that is the necessary price to stabilize the situation and protect our customers.

This generous speech sounds full of great irony today. He is not a stable participant reaching out to help, but rather a bankrupt and hollow fraud. His so-called “rescue” is merely to prevent the dominoes from continuing to fall, thereby exposing that he himself is the biggest hole.

When we piece these fragments together, the narrative from the founders of Three Arrows Capital that ‘SBF hunted us down’ no longer seems baseless. For FTX/Alameda, which was already in desperate struggles by June 2022, the motivation to liquidate a large high-leverage counterparty like Three Arrows is crystal clear: first, it’s ‘killing to plunder’, to immediately obtain the urgently needed liquidity to fill their own hole; second, it’s ‘killing the chicken to warn the monkey’, to stabilize the market by eliminating a huge source of risk, thereby covering up the truth that they are also ‘internally injured’.

They are not following the rules, but rather like a drowning person, desperately pulling another person nearby, just to get a breath for themselves.

The Ghost of Lehman Brothers

Placing this dispute in a broader historical context, we find that its pattern is not new. Stripping away the technical garb of cryptocurrency filled with terminology and codes, its core is merely a rehash of the 2008 financial crisis, a “reincarnation” of the story of Lehman Brothers’ collapse.

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

This is the most untouchable red line in the financial world. Whether it is the traditional banks of a century ago or today’s cryptocurrency exchanges, the customers’ money is the customers’ money, and the platform has no right to use it. However, after the bankruptcy of Lehman Brothers, it was discovered that there was “astonishing dereliction of duty” and “staggering violations” in their customer fund segregation. The entire fraud system of FTX was directly built on the premise of 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 is the same: a prolonged and chaotic reckoning.

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

History does not simply repeat itself, but it does follow similar rhymes. The legend of FTX and Three Arrows is not a unique “crypto” issue, but a classic tale about financial arrogance, regulatory failure, and human greed, just dressed in a trendy new outfit called “Web3.”

There is no end to heroes.

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

The truth is that this is not a contract lawsuit about “who defaulted,” but rather a naked “black eats black” survival game. Three Arrows Capital, certainly a greedy, reckless, and ultimately self-destructive “super gambler,” brought about its own downfall. However, FTX is by no means an innocent platform that operates by the rules. It is a “fraudster” that has already undergone its own malignant transformation, masquerading as healthy by “sacrificing” another opponent.

A dying gambler encounters a disguised conman. In that lawless, jungle-rule crypto slaughterhouse, they staged the final bloody duel.

The final judgment of the Delaware court may set some rules for future cryptocurrency bankruptcy cases. However, for this young industry eager to disrupt traditional finance, history has already written the verdict: when a system lacks strong regulation and transparent records, and when the slogan of “trustless” 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 “war of the dead” between FTX and Three Arrows is merely a “crypto circle” version of countless greed stories from Wall Street over the past century.