FTX bankruptcy estate says Grayscale owes creditors ‘at least $550 million’
Bankrupt crypto exchange FTX is suing Grayscale Investments through affiliated hedge fund Alameda Research to recoup losses realized from its investment in Grayscale’s Bitcoin Trust, the company said Monday in a press release.
“Our goal is to unlock value that we believe is currently being suppressed by Grayscale’s self-trading and improper redemption bans,” FTX Interim CEO John J. Ray III said in the release.
As part of its bankruptcy estate, FTX holds shares in Grayscale’s $14 billion Bitcoin Trust (GBTC) and $4.7 billion Ethereum Trust (ETHE).
FTX seeks an injunction to eliminate each trust’s discount by allowing redemptions. The company said such relief would “unlock a total of $9 billion or more for shareholders and a quarter of a billion dollars” for the bankrupt company.
“FTX customers and creditors will benefit from additional repayments, along with other Grayscale Trust investors harmed by Grayscale’s actions,” Ray said.
According to Alameda’s complaint filed in the Chancery Court of Delaware, if Grayscale reduced its fees and stopped preventing redemptions, FTX’s shares would be worth at least $550 million, or about 90% more than their current value.
These closed-end funds have traded at a significant discount to the value of the crypto assets each holds since February 2021, with current discounts of 44% and 54% for Grayscale’s Bitcoin Trust and Ethereum Trust, respectively, according to data from YCharts.
FTX also accuses Grayscale of earning $1.3 billion in management fees in violation of trust agreements.
“The lawsuit filed by Sam Bankman-Fried’s hedge fund, Alameda Research, is misconceived,” a spokeswoman for Grayscale told Yahoo Finance.
Grayscale has repeatedly said it cannot fix the discount for how shares in the bitcoin trust trade without seeking approval from the US Securities and Exchange Commission to convert its bitcoin trust into an exchange-traded fund (ETF).
“Grayscale has been transparent in our efforts to obtain regulatory approval to convert GBTC to an ETF – an outcome that is undoubtedly the best long-term product structure for Grayscale’s investors,” the spokeswoman added.
Gray tones, as well as trust shareholders who are critical of the company, have pointed out that shares can be redeemed if the asset manager applies for Regulation M status. However, Grayscale has said it will not seek Regulation M status without first trying to win the lawsuit against the SEC for not approving the application to convert the trust into an ETF.
Oral arguments for the lawsuit will be held on Tuesday before three judges in a court in Washington DC.
“The courts recognize that the agencies have expertise, but they don’t have a blank check,” Don Verrilli, a former assistant U.S. attorney hired by Grayscale for the lawsuit, said in a press conference last week.
FTX’s lawsuit against Grayscale follows a public inquiry by hedge fund Fir Tree in December, as well as proposals by asset managers Valkyrie, 3iQ and Osprey Funds to take over Grayscale’s Bitcoin Trust.
Osprey is also suing Grayscale, accusing the asset manager of “false and misleading” advertising of its bitcoin trust, according to a complaint filed in Connecticut’s Superior Court.
“We remain confident in the common sense, compelling legal arguments that will be asserted tomorrow before the DC Court of Appeals,” the Grayscale spokeswoman added.
Last week, FTX said it faces a “massive shortfall” after lining up $2.2 billion in FTX.com assets against $9.3 billion in net borrowings from hedge fund Alameda.
“We will continue to use all the tools we can to maximize recoveries for FTX customers and creditors,” Ray added.
David Hollerith is a reporter for Yahoo Finance. Follow him on Twitter @DSHollers
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