The failed crypto kings who want to be comeback kids

Seven months ago, the collapse of Kyle Davies and Su Zhu’s cryptocurrency hedge fund, Three Arrows Capital, helped set off a massive crypto crash that evaporated $1.46 trillion in market capitalization in a matter of months.

But in a dramatic comeback, Davies and Zhu have already announced the launch of a new crypto venture, which has raised $25 million.

Their well-capitalized rebirth is not a novelty in the crypto world. Less than a year after their companies went bust, top crypto executives are back on top of other firms, even as their former clients struggle to recoup even a fraction of the billions of dollars they lost.

Jason Harrow, an attorney at a new civil rights firm specializing in crypto consumer protection, said he was not surprised, because the crypto industry does not operate under the same regulations as other financial industries.

“Obviously there has been a wave of new crypto enforcement, but it’s in its early days,” he said. “These things have started to go up and down without the same consequences as other industries, so these people can rinse and repeat.”

“It’s not surprising because it’s been very difficult to hold these people accountable.”

Used Arrows’

Three Arrows collapsed in July after a death in the value of its Luna token, in which the company was heavily invested. The company’s fall completely devastated digital asset brokerage Voyager Digital — which lost an estimated $670 million in loans to Three Arrows and filed for bankruptcy protection the next month — and seriously injured several others. When it crashed, Three Arrows owed an estimated $3.5 billion to 27 companies, turning Zhu and Davies into public enemies in the crypto world. (It didn’t help that lawyers for the company’s creditors struggled to find them for weeks after the bankruptcy filing.)

This month, the pair announced the creation of their new crypto exchange: Open Exchange, which allows customers to trade bankruptcy claims of crypto companies that rose in the market crash – including the founders’ own. Zhu told The Wall Street Journal the company has raised at least $25 million in investment for the platform, which is scheduled to launch by the end of the month. The company tweeted last week that there were already more than 3,600 sign-ups.

A pitch deck for Open Exchange leaked late last month boasts that Zhu and Davies turned $1.2 million in investor funding into $4 billion at Three Arrows, before it “went bust.” It claims it will “fill the power vacuum left by FTX” and “dominate the crypto market within 2-3 months of going live.” The company said it wants to “lead the global trend towards financial transparency, security and liquidity.”

Photo illustration by Thomas Levinson/The Daily Beast/Pexels

Liquidators for Three Arrows, meanwhile, said in court filings that the founders still refused to cooperate with recovery efforts to repay creditors, including the sale of a $50 million yacht called “Much Wow” allegedly bought with company money.

“At best, the founders have made only selective and piecemeal disclosures, and have intentionally interfered with foreign representatives’ attempts to communicate,” the liquidators wrote in another lawsuit this month. “Simply put, their refusal to cooperate violates their duties to the Three Arrows.” (Davies responded with a tweet claiming that the liquidators had “not engaged constructively with us” and that they preferred to work directly with creditors.)

One of the biggest creditors hit by the Three Arrows bankruptcy was Genesis, a crypto lending firm that reportedly loaned Three Arrows around $2.4 billion and never got it back. Genesis executives claimed their company was recovering and remained solvent over the summer, but the collapse of Sam Bankman-Fried’s FTX in November delivered a death blow. Genesis suspended customer withdrawals on Nov. 16 — five days after FTX went under — and filed for bankruptcy last month, leaving an estimated $5.1 million owed to creditors.

The company was also hit last month with a case from the SEC alleging that it sold unregulated securities. And crypto exchange Gemini, a former business partner, turned on Genesis, claiming its bigwigs had lied about the state of its finances. Genesis specifically singled out former Chief Operating Officer Matt Ballensweig, who they say sent documents that falsely assured them the company had “the capital to operate and scale our business over the long term.”

“It wasn’t true that[Genesis’s parent company] has assumed certain obligations to Genesis,’” Gemini stated in response to a customer lawsuit. “It was not true that Genesis ensured that it had ‘the capital to operate … over the long term’.”

Art of the Comeback

Ballensweig left Genesis in September, following the departure of the company’s CEO and a management overhaul. But he reportedly resurfaced in mid-December, in an email that raised money for a new crypto fund called Hunting Hill Digital. According to emails obtained by CNBC, Ballensweig sought $5 million for the new venture — an offshoot of the $718 million Hunting Hill hedge fund.

Ballensweig claimed the fund had already raised $2.5 million from Bessemer Venture Partners — a claim the company denied when contacted by CNBC — and planned to launch its “flagship product” in the first quarter of 2023. Joining him on the fund were two others earlier earlier. Genesis executives, former CEOs Martin Garcia and Reed Werbitt.

Representatives for Hunting Hill confirmed that Garcia was chief investment officer at Hunting Hill Digital. A spokesperson said the fund had “discussions” with Ballenswieg and Werbitt but never started hiring. The company declined to comment on Ballenswieg’s emails.

Ballenswieg and Werbitt did not respond to multiple requests for comment.

Ballensweig, Garcia and Werbitt are not the only former Genesis leaders attempting a comeback. Roshun Patel, who left the company in March after more than a year as vice president, began raising money this summer for a new fund, DBA Crypto. An SEC filing from August listed Patel as a general partner along with former Galaxy Digital Vice President Michael Jordan and quant trader Shanne Barratt, and said they planned to raise $500 million.

In an interview that month, Patel reflected on the “bright side” of the crypto crash, saying, “Now everything is priced at a much lower point and going forward things look a lot more attractive. We’re excited about the opportunities for the rest of this year.”

The fund’s website, which was launched on January 3, does not mention Patel and Lim. Instead, it says the firm’s goal is to drown out the “grifters and idiots” in the cryptosphere by “elevating the good actors.”

The DBA and Patel did not respond to a request for comment.

One industry executive, who asked to remain anonymous, argued that there were employees at these bankrupt companies who were unaware of any bad decisions or abuses and should be allowed to rebuild their careers in the wake of the collapse.

“Crypto has definitely had its Enron and Lehman moments,” he said. “But if you look at these firms, there were a lot of people involved in running them who weren’t part of the bad decisions and … went on to build good businesses.”

“You kind of have to judge people on their own merits and not tar them with a single brush,” he added.

“The Hero’s Journey”?

John Jasnoch, a lawyer who has filed 10 class action lawsuits on behalf of crypto customers, agreed with this sentiment, but said it was too early to determine who had acted maliciously and who had not.

“I think investors should wait for that to come out before they invest money with these people,” he said.

No one can say that Alex Mashinksy was not involved in the company’s demise. The former CEO of crypto bank Celsius, who is now being sued by the state of New York for allegedly defrauding investors out of billions, also tried to plan his return this fall.

According to a recording obtained by New York Times, Mashinksy and Chief Compliance Officer Oren Blonstein tried to pitch employees to overhaul Celsius to focus on providing safe storage for users’ cryptoassets rather than big returns. Mashinksy is said to have compared Celsius to Delta and Pepsi – two well-known brands that went bankrupt – and claimed that the majority of users wanted the company to continue. (Celsius owed users $4.7 billion when it went bankrupt, according to court filings from this summer.)

Blonstein, meanwhile, claimed the bankruptcy was part of the company’s “hero’s journey.”

“This hero has a mission – something they want to achieve,” he said in the recording. “If we succeed, it’s going to be a success story like one that’s never been seen before.”

Mashinksy stepped down as CEO at the end of September, claiming he had become “a distraction”, but Blonstein remains.

Even FTX — the company that lost $8 billion in a spectacular implosion last fall — is planning a rally, according to newly appointed CEO John Ray, who is leading the company through its closely watched bankruptcy proceedings. Ray told The Wall Street Journal last month he considered capping the crypto exchange in hopes of recouping some of his customers’ lost funds. “Everything is on the table,” he said.

It is highly unlikely that former CEO Bankman Fried would return. He is under house arrest and is charged with securities fraud, bank fraud, money laundering and conspiracy to avoid campaign finance.