FTX’s Alameda Sues Gray Scale And DCG For Infringement Of Investment Fund Management

Key Points:

• Alameda Research, an affiliate of FTX, has filed a lawsuit against crypto asset management firm Grayscale and DCG for violating an investment fund management agreement.
• Alameda said over the past two years, Grayscale has charged “exorbitantly high” management fees, more than $1.3 billion.
• Alameda is seeking emergency relief to enable FTX debtors to realize the value of assets they claim is over $250 million.

FTX – a cryptocurrency trading platform that went bankrupt in November 2022 and its investment fund Alameda Research – suddenly filed a lawsuit against Grayscale Investments and its parent company, Digital Currency Group (DCG), claiming that both violated the investment fund management agreement. The lawsuit also accuses Grayscale CEO Michael Sonnenshein and DCG boss Barry Silbert.

As of March 6, 2023, Grayscale is managing assets of up to $19 billion in crypto funds, including $14 billion in Bitcoin and $4.7 billion in Ethereum.

According to the lawsuit, FTX/Alameda alleges that Grayscale charged “excessively high” management fees for Bitcoin and Ethereum fund products, even though they lost half their value. Specifically, the exchange announced that Grayscale has collected up to $ 1.3 billion in management fees in the last two years.

In addition, the company used “fabricated pretexts” to discourage shareholders from buying back their shares, causing the trust’s shares to trade about 50% below net worth.

If Grayscale reduces fees and allows the conversion of shares to original assets, the shares held by the exchange will be worth at least $550 million, up to 90% higher than the current value.

“We will continue to use every tool we can to maximize recoveries for FTX customers. Our goal is to unlock value that we believe is currently being suppressed by Grayscale’s self-dealing and improper redemption ban FTX customers and will benefit from additional recoveries, along with other Grayscale Trust investors that are being harmed by Grayscale’s actions.”

John J. Ray III, Chief Executive Officer and Chief Restructuring Officer of the FTX Debtors, said.

In an email regulatory to CoinDesk, a Alameda’s lawsuit for Grayscale called the “misguided.”

“Grayscale has been transparent in our efforts to obtain regulatory approval to convert GBTC into an [exchange-traded fund] – an outcome that is undoubtedly the best long-term product structure for Grayscale’s investors.”

In its latest update, FTX, at the beginning of March, said it has raised the number of recovered assets to $6.1 billion, although many of them are illiquid crypto tokens. The bankruptcy unit that took over FTX admitted that the exchange suffers from a heavy balance sheet deficit with liabilities of up to $9.4 billion.

Grayscale, in December 2022, announced that it would consider converting treasury shares back to its original assets if it did not get a nod from the US authorities on the issue of ETFs.

As for DCG, the corporation had to go through a crisis stemming from the collapse of FTX itself, resulting in letting another subsidiary, the lending unit Genesis, go bankrupt.

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