Fir Tree Capital Management has sued Grayscale Investments 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.
Various funds under Fir Tree–collectively owning around 3.2 million shares in the Trust–banded together as plaintiffs for the suit, claiming that the Trust “has flagrantly disregarded its purpose and utterly failed to achieve its stated objectives.”
“The Trust’s Share price has collapsed by 80% within the past year alone. Shares now trade at a steep 40-45% discount to net asset value (NAV). This means that for every dollar of Bitcoin owned by the Trust, its corresponding Shares are worth only 55 cents,” the plaintiffs added.
The plaintiffs also called out the 2% fee “calculated by reference to the market value of the Trust’s Bitcoin holdings—rather than the market price of the Trust’s Shares.”
“As a result, Grayscale has collected hundreds of millions of dollars in excessive fees—siphoning off the Trust’s assets while failing to do its job. In 2021 alone, Grayscale collected a whopping $615.42 million in fees from the Trust,” they added.
Grayscale’s redemption bar, which dates back to 2014, Fir Tree asserts is “self-imposed,” and Grayscale refuses to redeem shares because it would reduce revenues. The firm also wants Grayscale to stop attempting to convert the trust into an ETF, which it has done frequently in the past without success.
“That strategy will likely cost years of litigation, millions of dollars in legal fees, countless hours of lost management time, and goodwill with regulators,” Fir Tree’s lawyers said in the complaint. “All the while, Grayscale will continue to collect fees from the trust’s dwindling assets.”
The plaintiffs also highlighted the conflicts of interest between Grayscale, its parent company Digital Currency Group, and other sister companies.
“Despite these substantial conflicts of interest, Grayscale and the Trust appear to have no independent oversight. Until last year, Mr. Silbert served as the Chairman and Chief Executive Officer of both DCG and Grayscale, as well as a member of Grayscale’s Audit Committee,” the plaintiffs wrote.
They added that Grayscale’s Board of Directors and Audit Committee, to this day, “consist entirely of insiders, including Grayscale’s CEO, COO, and CFO, and DCG’s President… and the Trust has no independent Board of Directors and has stripped its Delaware trustee of nearly all oversight authority.”
The litigators are alleging that Grayscale breached the Fifth Trust Agreement, which provides, “the Shareholders shall have the right to obtain from the Sponsor information on all things affecting the Trust, provided that such information is for a purpose reasonably related to the Shareholder’s interest as a beneficial owner of the Trust.”
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The plaintiffs then ask the court to order Grayscale to “make available to Plaintiffs, for inspection and copying, the books and records of the Trust, and to otherwise provide access to information on all things affecting the Trust.”
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