FTX is suing Grayscale for $250 million for preventing redemptions

Bankrupt proprietary trading company Alameda Research has sued Grayscale for lowering the value of FTX Debtors’ shares in its Bitcoin and Ethereum Trusts.

Alameda alleges that the company reduced the value of FTX Debtors’ shares by 90% by avoiding redemption, causing the Trusts to trade at a significant discount to their net asset value.

FTX CEO Hopes to Unlock $250 Million Bitcoin and Ethereum Trusts for Creditors

“Our goal is to unlock value that we believe is currently being suppressed by Grayscale’s self-trading,” said John J. Ray III, the bankruptcy expert who oversaw Enron’s bankruptcy and is now CEO of FTX Trading.

Ray was appointed after the Bahamian stock exchange and its affiliated hedge fund Alameda Research filed for bankruptcy in November 2022. He hopes to release $250 million from Grayscale to FTX creditors and criticized Grayscale’s self-interest in avoiding redemptions.

According to the press release, Grayscale raised approximately $1.3 billion in management fees for the crypto trusts. Grayscale charges a 2% annual management fee to Grayscale Bitcoin Trust clients.

Investors can only sell shares on the public market after six months. However, the company also states that “share buybacks are currently not permitted.”

GBTC Management Fee | Source: Grayscale Investments

FTX also filed a lawsuit against Barry Silbert, the CEO of Digital Currency, Grayscale’s parent company. Billionaire Cameron Winklevoss accused Silbert and DCG of “bad faith tactics” after Grayscale sister company Genesis Global Capital prevented Gemini clients from accessing funds during a liquidity crisis. Genesis is going through Chapter 11 bankruptcy.

FTX will try to recover as much money as possible, lawyer says

Crypto lawyer John Deaton, who successfully argued that the SEC should not monitor secondary sales of LBRY’s LBC token, told BeInCrypto that he was one of the few lawyers who predicted that Grayscale would win its case against the SEC, said about the Alameda lawsuit.

“[FTX/John Ray will say] you owe us money because you have not acted in the best interests of GBTC shareholders because your fees are too high. And so they make these claims, and then they hope to settle, settle and get as much money back as possible,” he said in an exclusive interview.

“[John Ray] can submit [the lawsuit], and the next thing will be a motion to reject it. And if Grayscale loses the motion to dismiss, it becomes leverage to negotiate a better value for Alameda. If the Alameda accounts, you know, are only worth 50%. If he can get 60%, that’s what he’s going to do.

Grayscale attorney meets SEC in court

Currently, Grayscale’s Bitcoin Trust shares are trading at 45% below the value of the underlying Bitcoin they represent. The Securities and Exchange Commission has rejected Grayscale’s attempts to convert GBTC into an exchange-traded fund to close the discount.

GBTC Trust dashboard.  Image Source Grayscale Investments
GBTC Trust Dashboard | Source: Grayscale Investments

The company tapped Donald Verilli Jr., a former attorney general who served in the Obama administration, to claim that the denial of the conversion is “arbitrary and erratic.”

Grayscale will go to the U.S. Court of Appeals for the Circuit Court of the District of Columbia on March 7, 2023 to argue that the SEC has been inconsistent in allowing bitcoin futures ETFs, but not in spotting Bitcoin ETFs.

“I believe Grayscale is going to win. I’m one of the few people who predicted a grayscale victory. I think it’s random and whimsical. And I think the SEC should lose that case,” Deaton opined.

Grayscale CEO Michael Sonnenshein previously said the company would consider a takeover bid to buy back outstanding GBTC shares.

Grayscale’s parent company, the Digital Currency Group, has begun selling GBTC shares on the open market to weather Genesis’ bankruptcy. Under US law, DCG is only allowed to sell 1% of its shares on the open market.

BeInCrypto could not reach Grayscale for comment as it went to press.

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BeInCrypto has reached out to the company or individual involved in the story to get an official statement on recent developments, but it has not yet heard back.

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