Alameda Sues Grayscale, DCG In Attempt To Unlock Value In Bitcoin Trust For FTX

The new leadership team of the bankrupt crypto exchange FTX revealed on Friday that the bankrupt cryptocurrency exchange’s sister business, hedge fund Alameda Research, has sued asset management Grayscale Investments in an effort to recoup assets for FTX customers and creditors.

Grayscale, according to the FTX debtors led by CEO John Ray III, is preventing shareholders in Grayscale’s Bitcoin and Ethereum Trusts from redeeming their shares and charging “exorbitant management fees,” which they claim is suppressing the value of the shares.

The plaintiff is seeking injunctive relief in a bid that it claims could “unlock $9 billion or more in value for trust shareholders” and “realize over a quarter billion dollars in asset value for the FTX debtors’ customers and creditors.” Alameda is also suing Grayscale’s owners, Digital Currency Group and Barry Silbert, as well as CEO Michael Sonnenshein.

“We will continue to use every tool we can to maximize recoveries for FTX customers and creditors. Our goal is to unlock value that we believe is currently being suppressed by Grayscale’s self-dealing and improper redemption ban,” Ray said.

The complaint described Grayscale having extracted “over $1.3 billion in exorbitant management fees in violation of the [Grayscale Bitcoin and Ethereum Trusts] agreements,” and has “hidden behind contrived excuses to prevent shareholders from redeeming their shares.”

The FTX debtors said these actions “have resulted in the Trusts’ shares trading at approximately a 50% discount to Net Asset Value.”

“If Grayscale reduced its fees and stopped improperly preventing redemptions, the FTX Debtors’ shares would be worth at least $550 million, approximately 90% more than the current value of the FTX Debtors’ shares today,” they added.

Sam Bankman-Fried co-founded both FTX and Alameda, and he is currently facing a dozen federal charges in connection with the collapse of his crypto empire last year, which resulted in clients losing billions of dollars. He and other former executives at the sister firms are accused of diverting funds from FTX customers to support the hedge fund during a run on the bank at the exchange.

The fresh legal move adds to the current court battles Grayscale is facing. In December 2022, Fir Tree Capital Management sued Grayscale seeking information that could be used to make changes in the way its flagship $10.7-billion Bitcoin Trust is administered.

“Plaintiffs have serious questions about Grayscale’s mismanagement of the Trust and the troubling reports about liquidity issues within Digital Currency Group and its corporate affiliates, which have been exacerbated by a recent raft of bankruptcy filings in the digital assets market. Plaintiffs are entitled to answers, but Grayscale has offered none. What is Grayscale hiding?” the plaintiffs wrote in the suit.

Grayscale pushes back

Grayscale responded in a statement, calling Alameda’s action “misguided” and citing its continuing effort to convert its bitcoin trust into an ETF, which the Securities and Exchange Commission has rejected.

“The lawsuit filed by Sam Bankman-Fried’s hedge fund, Alameda Research, is misguided,” a spokeswoman said in a statement. “Grayscale has been transparent in our efforts to obtain regulatory approval to convert GBTC (Grayscale Bitcoin Trust) into an ETF — an outcome that is undoubtedly the best long-term product structure for Grayscale’s investors.”

Last year, Grayscale planned to take the US Security and Exchange Commissions to court after the regulatory body denied its application to convert Grayscale Bitcoin Trust to a spot Bitcoin ETF. The regulatory agency denied the move, highlighting concerns about market manipulation, saying that the proposal lacks in ensuring protections for the investors.

FTX released an analysis of its shortfalls last week, top billed by a deficit of $8.7 billion in customer funds, including $6.4 million in missing cash and stablecoins. The report also showed that the bankrupt crypto exchange is owed to some $12.8 billion by Alameda.

With the trial set for October, the plaintiffs case against Bankman-Fried got another boost after a third member of his inner circle pled guilty to fraud charges and agreed to cooperate with federal prosecutors. Nishad Singh, the company’s former director of engineering, pled guilty to six criminal offenses, including conspiracy to commit securities and commodities fraud.

The 27-year old Singh stated that he discovered Bankman-Fried’s crypto hedge fund Alameda Research was borrowing FTX customer funds in mid-2022. He added that Alameda would be unable to return the billions of dollars it had borrowed from FTX by September 2022 and admitted that he faked FTX’s revenues at the request of Bankman-Fried in order to make the company more desirable to investors.

Information for this briefing was found via Fox News and the sources mentioned. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.

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