Liquidators for Three Arrows Capital (3AC) have initiated a lawsuit against Terraform Labs, seeking $1.3 billion in damages due to significant losses incurred following the collapse of the Terra ecosystem in May 2022.

The lawsuit alleges that Terraform Labs manipulated the market for the Luna and TerraUSD tokens, which contributed to the financial downfall of 3AC after the cryptocurrency crash.

Following a bankruptcy declaration by a British Virgin Islands court, Teneo was appointed as the liquidator to manage 3AC's remaining assets and recover funds for its creditors.

This legal action is part of broader efforts to recover lost investments for 3AC's creditors, who are reportedly owed approximately $3.3 billion after the fund's collapse.

The fallout from the LUNA collapse led to widespread losses across the cryptocurrency industry, resulting in multiple bankruptcies, including that of 3AC itself.

The legal action follows the May 2022 collapse of the Terra network's algorithmic stablecoin, TerraUSD (UST), and its companion token, Luna, which collectively lost $40 billion in value.

Represented by Teneo, the liquidators argue that misleading information from Terraform Labs led 3AC to invest heavily in Terra, contributing to their financial losses after UST depegged from the dollar.

The outcome of the lawsuit against Terraform Labs remains uncertain, especially as Do Kwon, co-founder of Terraform, faces multiple legal challenges including a civil fraud conviction.

Do Kwon was arrested in Montenegro last year and is currently facing extradition proceedings to South Korea, where he faces charges related to the failure of LUNA and TerraUSD.

A British Virgin Islands court has prohibited 3AC co-founders Su Zhu and Kyle Davies from transferring or selling assets worth up to $1.1 billion.

These ongoing legal battles raise concerns about the future of both 3AC and Terraform Labs, as well as the broader implications for the cryptocurrency market amid increased regulatory scrutiny.

As of January 2024, Terraform Labs is facing its own financial crisis, complicating the legal proceedings surrounding the lawsuit.