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FTX bankruptcy estate says Grayscale owes creditors 'at least $550 million'

Bankrupt crypto exchange FTX is suing Grayscale Investments through affiliate 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-dealing and improper redemption ban," FTX's interim CEO John J. Ray III said in the release.

As part of its bankruptcy estate, FTX holds shares of Grayscale's $14 billion Bitcoin Trust (GBTC) and $4.7 billion Ethereum Trust (ETHE).

FTX is seeking injunctive relief to eliminate each trust's discount by allowing redemptions. The company said, such relief would "unlock a combined $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 recoveries, along with other Grayscale Trust investors that are being 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 approximately 90% more than their current value.

These closed-end funds have traded at a significant discount to the value of crypto assets each of them hold since February 2021, with the current discounts standing at 44% and 54% for Grayscale's Bitcoin Trust and Ethereum Trust, respectively, according to data from YCharts.

FTX is also accusing Grayscale of having earned $1.3 billion in management fees in violation of trust agreements.

"The lawsuit filed by Sam Bankman-Fried’s hedge fund, Alameda Research, is misguided," a spokeswoman for Grayscale told Yahoo Finance.

Grayscale has repeatedly said it cannot fix its discount for how shares of its bitcoin trust trades without seeking approval by the U.S. Securities and Exchange Comission 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 into an ETF – an outcome that is undoubtedly the best long-term product structure for Grayscale’s investors," the spokeswoman added.

UNITED STATES - DECEMBER 13: John J. Ray III, CEO of FTX Group, testifies during the House Financial Services Committee hearing titled Investigating the Collapse of FTX, Part I, on Tuesday, December 13, 2022. Ray took over after the resignation of Sam Bankman-Fried. (Tom Williams/CQ-Roll Call, Inc via Getty Images)
John J. Ray III, CEO of FTX Group, testifies during the House Financial Services Committee hearing titled Investigating the Collapse of FTX, Part I, on Tuesday, December 13, 2022. Ray took over after the resignation of Sam Bankman-Fried. (Tom Williams/CQ-Roll Call, Inc via Getty Images) (Tom Williams via Getty Images)

Grayscale, as well as trust shareholders critical of the company, have pointed out shares can be redeemed if the asset manager seeks Regulation M status. However, Grayscale has said it will not seek Regulation M status as without first trying to win its lawsuit against the SEC for not approving its application to convert the trust into an ETF.

Oral arguments for the lawsuit will be held Tuesday before three judges in a Washington D.C. court.

"The courts recognize that the agencies have expertise, but they don't have a blank check," Don Verrilli, a former U.S. Solicitor General hired by Grayscale for the lawsuit, said last week in a media briefing.

FTX's lawsuit against Grayscale follows a public request by hedge fund Fir Tree in December, as well as proposals from 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 argued tomorrow before the D.C. Court of Appeals," the Grayscale spokeswoman added.

Last week, FTX said it faces a "massive shortfall" after having located $2.2 billion in FTX.com assets against $9.3 billion of net borrowings by hedge fund, Alameda.

"We will continue to use every tool 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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