New York court freezes assets of Three Arrows Capital

A federal judge in New York bankruptcy court froze the remaining assets of cryptocurrency hedge fund Three Arrows Capital after the firm quickly fell into disrepute.

The fund, founded nearly a decade ago, managed $10 billion in assets just a few months ago. Now his two co-founders are on the run from angry creditors who are trying to recoup some of their losses. Before filing for bankruptcy, a court in the British Virgin Islands ordered the liquidation of the beleaguered fund to pay off its debts.

Judge Martin Glenn of the Southern District of New York granted an emergency motion to freeze Three Arrows’ assets on Tuesday. CNBC joined the court hearing to discuss the next steps in the bankruptcy process.

Glenn noted in the written decision that only the appointed receivers have the authority to “transfer, encumber, or otherwise dispose of any of the Debtor’s assets within the territorial jurisdiction of the United States.”

As part of Glenn’s ruling, Teneo, a global consulting firm tasked with managing the liquidation, also received permission to subpoena Three Arrows co-founders Zhu Su and Kyle Davis, as well as banks, cryptocurrency exchanges and other institutions and firms that did business with the firm.

The main problem is that Three Arrows, also known as 3AC, and its management can siphon funds before the official liquidation. Coindesk reported that Zhu is looking to sell his property in Singapore for $35 million.and there are reports of at least one more transfer of digital assets of a non-fungible token owned by the fund.

“A key part of this petition is to draw the attention of the world to the fact that it is the liquidators who control the assets of the debtor at this stage,” Adam Goldberg, an attorney representing Teneo, said at a hearing on Tuesday.

Zhu and Davis did not respond to requests for comment. Their attorney, Christopher Anand Daniel of Singapore-based Advocatus Law, also did not respond to a CNBC request for comment.

Goldberg of the law firm Latham & Watkins said the liquidators are looking for documents such as account statements and digital wallet information.

The main reason for the aggressive action is that Zhu and Davis’ physical whereabouts are “currently unknown,” lawyers representing the creditors said. Lenders also claim that liquidators in Singapore found 3AC’s offices vacant except for a few inactive computer screens.

But after a nearly month-long hiatus from Twitter, Zhu broke his silence on Twitter early Tuesday morning, writing that the firm’s efforts to work with lenders were met with “bullying.”

From his verified account, Zhu shared screenshots of emails sent by his lawyer to lawyers representing the liquidators. In these messages, the lawyer wrote that the families of the co-founders “received threats of physical violence.” He also said that Zhu and Davis “worked under severe time constraints”, noting that they “had to respond to inquiries from the Monetary Authority of Singapore last week.”

In an email, Daniel, their lawyer, said he had attached a spreadsheet with details of the company’s assets, and said they would provide more information about the firm’s assets “as it becomes available.”

CNBC asked Daniel for a spreadsheet but got no response. Goldberg stated during the hearing that the information provided to his team “is by no means a sufficient form of cooperation.”

Nick Carter of Castle Island Ventures, which invests in blockchain-based companies, said the process could eventually take years.

“I wouldn’t hold my breath to see how the situation would play out,” Carter said. “I would be extremely concerned about disposing of assets and trying to get them out or possibly expropriate assets that are owed to creditors and take them out of the process for personal use of the principles here.”

Carter said the case is particularly complex because it involves companies in Dubai, Singapore and other offshore locations.

“The level of coordination needed to unify the legal process here is very important,” Carter said.

— Dan Mangan of CNBC contributed to this report.