On Monday, Alameda Research, sister firm and hedge fund of collapsed cryptocurrency exchange FTX, announced it has filed a lawsuit against digital-asset manager Grayscale Investments and its CEO and owners as part of a collaborated effort to recover funds for FTX’s customers and creditors.
FTX Trading, which is currently under the leadership of John Ray III, alongside its affiliated debtors’ group known as FTX Debtors, is seeking “injunctive relief” to unlock $9 billion or more in value for Grayscale’s Bitcoin and Ethereum Trust shareholders. The plaintiff expects to realize over a “quarter billion dollars” in asset value for FTX creditors.
FTX Debtors Sue Grayscale To Unlock More Than $500 Million In Shares
FTX Debtors, which include FTX exchange, trading firm Alameda Research, and 134 subsidiaries, were co-founded or invested in by Sam Bankman-Fried. The former billionaire and his partners, including FTX executives Gary Wang and Nishad Singh and Alameda CEO Caroline Ellison, are accused of mismanaging $10 billion in customer funds, leading to the collapse and eventual bankruptcy of the crypto empire in November 2022.
At its height, FTX was valued at $32 billion and was the third-largest cryptocurrency exchange by trading volume. Bankman-Fried, who is currently under house arrest, faces 12 criminal charges. If found guilty of his crimes, the former FTX CEO is looking at more than 100 years behind bars.
Grayscale allows investors to trade shares in trusts holding large amounts of Bitcoin (BTC) and Ethereum (ETH) without having direct exposure to the volatile assets.
According to the complaint, FTX used customer funds to purchase $290 million worth of shares in the Grayscale Bitcoin Trust (GBTC) and Grayscale Ethereum Trust (ETHE), which it claims to amount to more than 3% and 2%, respectively.
FTX accuses the asset manager of having extracted over $1.3 billion in management fees, which violates the Trust’s terms of the agreement. GBTC, valued at $14.1 billion, charges a 2% annual fee, while ETHE, valued at $4.7 billion, charges a 2.5% fee. This is much higher compared to the 0.54% average charged by all exchange-traded funds (ETFs) in the United States. The crypto exchange also accuses Grayscale of making “contrived excuses” to prevent shareholders from redeeming their shares.
FTX alleges that Grayscale’s actions have led to the Trusts’ shares trading at a nearly 50% discount compared to the value of the underlying asset, which in this case is BTC ($22,476) and ETH ($1,575). GBTC offers 0.000909 BTC per share while ETHE offers 0.00975 ETH per share purchased. The lawsuit claims that if Grayscale reduced its fees and allowed redemptions, the combined value of FTX Debtors’ shares alone would increase 90% above its current value to approximately $540 million.
John Ray III, the Chief Executive Officer, and Chief Restructuring Officer of FTX said his team will continue to use every tool at their disposal to “maximize” recoveries for the company’s customers and creditors.
The lawsuit aims to unlock the true value of FTX’s shares in the Trusts that are being suppressed by Grayscale through its “self-dealing” and “improper” redemption ban. FTX believes the move will largely benefit its customers and creditors who have been unable to recover their funds from the exchange since its bankruptcy in November, alongside other Grayscale Trust investors.
Grayscale’s On-Going Efforts To Turn Bitcoin Trust Into ETF And Legal Battles
Grayscale, who is already involved in an ongoing legal battle with the U.S Securities and Exchange Commission (SEC) to turn its Bitcoin Trust into an ETF, responded to Alameda’s accusations by stating it was “misguided”.
A spokesperson for Grayscale said the company has always remained “transparent” in its efforts to obtain regulatory approval to convert GBTC into an ETF and believes it will “undoubtedly” be the best long-term product structure for investors.
In addition to FTX, Grayscale also faced lawsuits from rival digital-asset manager Osprey Funds and hedge fund Fir Tree Capital Management concerning its Bitcoin Trust. Osprey accused the asset manager of misleading investors by falsely promoting the product as an ETF while Fir Tree accused Grayscale of “harming” retail investors with its “shareholder-unfriendly” actions.
The complaint filed by Alameda Research at the Court of Chancery in the State of Delaware also includes Grayscale CEO Michael Sonnenshein, its owners Digital Currency Group (DCG), and CEO Barry Silbert.