Lawsuit puts pressure on Grayscale to open GBTC books

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Fir Tree, the hedge fund that previously announced it was shorting tether, has now filed a lawsuit against the Grayscale Bitcoin Trust (GBTC) alleging misconduct and seeking records to help determine that.

What does Fir Tree allege?

Fir Tree alleges that Grayscale has breached the trust agreement by not allowing shareholders to review relevant documents.

More specifically, Fir Tree believes that the relationship between Grayscale and Digital Currency Group (DCG) and Genesis means it should be able to review a relatively broad number of Grayscale’s documents.

Its claimed justifications include a need to investigate potential mismanagement or wrongdoing, to understand how the trust has changed, to identify how the trust is exposed to loans made by Genesis, and for Fir Tree to be able to communicate with other GBTC shareholders.

To the point of mismanagement or wrongdoing they point to several things:

  • Grayscale has failed to allow redemptions, allowing GBTC to trade at large discounts to Net Asset Value (NAV) while profiting from fees charged based on NAV.
  • Grayscale has relied on related parties in order to operate the trust:
    • Until recently Genesis Global Trading, another DCG company, was the only entity that could create or redeem shares.
    • Genesis is the only entity allowed to purchase bitcoin for the creation of shares.
    • Grayscale Securities, wholly owned by Grayscale, is now the only entity that can create or redeem shares.
    • Coinbase, which DCG invested in, is the custody provider.
    • Genesis, another DCG entity, was lending the underlying assets against Grayscale products to allow the creation of more shares when it traded at a premium to NAV, and this was specifically signed off on by Grayscale.
  • Lack of independent oversight of GBTC, with (until last year) Barry Silbert serving as CEO for both Grayscale and DCG.

Fir Tree’s primary issue around changes to the trust concerns Grayscale’s ability to operate a redemption program.

Up until September 2014, Grayscale operated a redemption program wherein it was possible for shares of GBTC to be redeemed for the underlying bitcoin. In September 2014, Grayscale received a letter from the Securities and Exchange Commission (SEC) informing it that the program violated Regulation M.

According to the Commission, this was because it allowed for shares to be simultaneously issued and redeemed. Grayscale hasn’t redeemed any shares since then. Fir Tree and others believe that it would be possible for Grayscale to operate a redemption program, as long as it is not issuing.

The ‘Third Trust Agreement,’ which was adopted by Grayscale at the beginning of 2016, contained a clause that amendments to the trust agreements that “adversely affect” the rights of shareholders would “occur only upon the written approval” of a majority of shares.

In October 2017, Grayscale sent proposed amendments to shareholders that made it much easier for Grayscale to refuse redemptions. Also included in the notice was the condition that it would become effective even without a majority vote. Further amendments that more specifically prohibited Grayscale from operating a redemption program were added in a similar manner in subsequent amendments.

Read more: Grayscale Bitcoin Trust and its ties to crypto meltdowns

Grayscale maintains that its goal is to convert the trust into an ETF which will then allow it to perform redemptions.

Fir Tree wants details on how the trust has changed to better understand when restrictions and changes have been added.

It’s not clear how much of Fir Tree’s broad request will end up being granted by the court.

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