(Bloomberg) -- Fir Tree Capital Management is suing Grayscale Investments for information to investigate potential mismanagement and conflicts of interest at its $10.7 billion Bitcoin fund.
The Grayscale Bitcoin Trust closed Monday at a 43% discount to the value of the Bitcoin it holds, in part because the firm issued many shares in the past few years and didn’t redeem any of them, according to a complaint filed Tuesday in Delaware Chancery Court.
The trust’s publicly traded shares have plunged about 75% this year, as the industry deals with the fallout from last month’s bankruptcy of Sam Bankman-Fried’s crypto exchange FTX and a tumble in Bitcoin and other cryptocurrencies.
Fir Tree, which manages $3 billion, wants to use the information to push Grayscale to erase the discount by lowering fees and resuming redemptions, said people familiar with the hedge fund’s plans. The trust has roughly 850,000 retail investors who have been “harmed by Grayscale’s shareholder-unfriendly actions,” the firm said in the complaint.
Grayscale is owned by Barry Silbert’s Digital Currency Group, which also runs Genesis Global Trading, a crypto lender and broker that halted withdrawals in November — fueling questions about the health of its parent.
“In 2013, we launched Grayscale Bitcoin Trust (GBTC) to provide investors with access to Bitcoin, and always with the intention of converting it to an ETF when permitted by US regulators,” a Grayscale spokesperson said in an emailed statement. “We remain 100% committed to converting GBTC to an ETF, as we strongly believe this is the best long-term product structure for GBTC and its shareholders.”
Fir Tree alleges that Grayscale’s redemption bar, which dates from 2014, is “self-imposed.” The hedge fund said there’s no legal reason that stops the trust from allowing investors to exit, as long as it complies with securities laws. Grayscale has said in regulatory filings it can’t offer an “ongoing redemption program.”
The hedge fund claims Grayscale refuses to redeem shares because doing so would cut into profits. The firm sold “an immense number” of new shares between 2018 and 2021, according to the lawsuit. It charges 2% — higher than competitors such as Osprey Bitcoin Trust — on the market value of its Bitcoin holdings rather than the lower market price of the shares. Last year, Grayscale collected $615.4 million in fees, Fir Tree said.
Grayscale Bitcoin Trust boomed in popularity during crypto’s bull run in 2020 and 2021, quickly becoming the world’s biggest digital-assets fund as investors looked for access to Bitcoin without having to buy the coins directly. That seemingly insatiable demand boosted the trust’s price to a persistent premium above the value of its underlying Bitcoin, fueling one of the industry’s most popular arbitrage trades.
The complaint is a “books and records” action, demanding documents that could be used in court to get Grayscale to take action to close the discount. Delaware judges often grant such requests.
Fir Tree also is looking for internal files about the alleged interdependency of Digital Currency Group’s businesses, which it said is “especially troubling given recent events in the crypto ecosystem, including the rapid collapse of FTX and Three Arrows Capital.”
The firm said it’s also concerned by the fund’s lack of independent oversight.
Fir Tree said it wants Grayscale to stop its efforts to convert the trust into an exchange-traded fund, which Grayscale claims is the only way it can legally redeem shares.
The US Securities and Exchange Commission refused to bless the conversion earlier this year, as it has for similar funds, and Grayscale is suing the regulator over the refusal.
“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 case is Fir Tree Value Master Fund LP v. Grayscale Investments LLC, No. 2022-1126, Delaware Chancery Court (Wilmington).
--With assistance from Katie Greifeld.
(Updates with Grayscale comment in sixth paragraph, case citation in last.)
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