New York Judge Freezes Assets of Three Arrows Capital as Crypto Firm's Founders Remain Underground

• A federal judge in a New York bankruptcy court has frozen the remaining assets of once-prominent crypto hedge fund Three Arrows Capital.
• Judge Martin Glenn of the Southern District of New York granted the emergency motion during a court hearing on Tuesday.

A federal judge in a New York bankruptcy court has frozen the remaining assets of crypto hedge fund Three Arrows Capital following the firm's rapid fall from prominence.

The fund, founded nearly a decade ago, managed $10 billion in assets just a few months ago. Now, its two co-founders are in hiding from angry creditors, who are trying to recoup some of their losses. Prior to the bankruptcy filing, a court in the British Virgin Islands ordered the beleaguered fund to liquidate in order to pay back its debts.

Judge Martin Glenn of the Southern District of New York granted the emergency motion on Tuesday to freeze Three Arrows' assets. CNBC joined a court hearing, which covered next steps in the bankruptcy process.

Glenn noted in the written decision that only the assigned bankruptcy liquidators have the authority to "transfer, encumber or otherwise dispose of any assets of the Debtor located within the territorial jurisdiction of the United States."

As part of Glenn's ruling, global advisory firm Teneo, which was assigned to manage the liquidation, was also granted permission to subpoena Three Arrows co-founders Zhu Su and Kyle Davies, as well as banks, crypto exchanges and other institutions and firms that have done business with the firm.

The chief concern is that Three Arrows, also known as 3AC, and its leadership team might be siphoning funds ahead of the formal liquidation. Coindesk reported that Zhu is looking to sell his $35 million Singapore property, and there are reports of at least one other digital asset transfer of a non-fungible token held by the fund.

"A key part of this motion is to put the world on notice that it is the liquidators that are controlling the debtor's assets at this stage," Adam Goldberg, an attorney representing Teneo, said in Tuesday's hearing.

Zhu and Davies didn't respond to requests for comment. Their lawyer, Christopher Anand Daniel of Singapore-based Advocatus Law, also didn't respond to CNBC's request for comment.

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

A main reason for the aggressive action is that the physical whereabouts of Zhu and Davies are "currently unknown," according to lawyers representing the creditors. The creditors also allege that liquidators in Singapore found that 3AC's offices were vacant, save for a few inactive computer screens.

But after a nearly month-long hiatus from Twitter, Zhu broke his silence on Twitter early Tuesday, writing that the firm's efforts to cooperate with creditors had been met with "baiting."

From his verified account, Zhu shared screengrabs of emails sent by his lawyer to counsel representing liquidators. In those messages, the attorney wrote that the families of the co-founders "have received threats of physical violence." He also said Zhu and Davies have been "working under a lot of time pressure," noting that they "had to field queries from the Monetary Authority of Singapore in the last week."

In the email, Daniel, their attorney, said he attached a spreadsheet with details of the company's assets and said they would be providing additional information about the firm's assets "on a rolling basis."

CNBC asked Daniel for the spreadsheet, but didn't hear back. Goldberg said during the hearing that the information provided to his team is "by no means a sufficient form of cooperation."

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

"I wouldn't hold my breath to see the situation resolved," said Carter. "I'd be extremely concerned about dispositions of assets and trying to extricate them or maybe expropriate assets that are owed to creditors, and siphon those out of the process for the personal usage of the principles here."

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

"The level of coordination that's required in order to unify the legal process here is very significant," Carter said.

— CNBC's Dan Mangan contributed to this report.