FTX Debtors Sue Grayscale Investments and its CEO for Alleged Breach of Trust Agreements and Fiduciary Duties
In a surprising turn of events, FTX Trading Ltd. and its affiliated debtors (FTX Debtors) have filed a lawsuit against Grayscale Investments LLC, its CEO Michael Sonnenshein, and its owners Digital Currency Group and Barry Silbert. The lawsuit, filed in the Court of Chancery in the State of Delaware, seeks injunctive relief to unlock $9 billion or more in value for shareholders of the Grayscale Bitcoin and Ethereum Trusts, which are controlled by Grayscale.
According to the complaint filed by Alameda Research Ltd., one of the debtor affiliates of FTX Trading, Grayscale has breached the trust agreements and fiduciary duties by extracting over $1.3 billion in management fees over the past two years alone. Furthermore, Grayscale has been hiding behind contrived excuses to prevent shareholders from redeeming their shares. These actions have resulted in the Trusts’ shares trading at approximately a 50% discount to their net asset value.
The lawsuit also claims that 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 their current value.
The FTX Debtors are represented by Quinn Emanuel Urquhart & Sullivan LLP as legal counsel, and Abrams & Bayliss LLP as Delaware counsel. In their chapter 11 cases, the FTX Debtors are represented by Sullivan & Cromwell LLP as legal counsel and Landis Rath & Cobb LLP as Delaware counsel.
John J. Ray III, Chief Executive Officer and Chief Restructuring Officer of the FTX Debtors, stated that they will continue to use every tool they can to maximize recoveries for FTX customers and creditors. He believes that unlocking the value that is being suppressed by Grayscale’s self-dealing and improper redemption ban will benefit FTX customers and creditors, along with other Grayscale Trust investors that are being harmed by Grayscale’s actions.
This lawsuit is significant as it sheds light on the opaque world of cryptocurrency trusts and the fees charged by their managers. It remains to be seen how Grayscale will respond to these allegations and whether the court will grant the injunctive relief sought by the FTX Debtors.
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