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`ALAMEDA RESEARCH LTD.,
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`C.A. No. ___________
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`Plaintiff,
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`v.
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`GRAYSCALE INVESTMENTS, LLC,
`DIGITAL CURRENCY GROUP, INC.,
`MICHAEL SONNENSHEIN, and
`BARRY SILBERT,
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`Defendants.
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`VERIFIED COMPLAINT
`Plaintiff Alameda Research Ltd. (“Plaintiff” or “Alameda”), a debtor in
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`possession that has filed a petition for relief under chapter 11 of the United States
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`Bankruptcy Code, by and through its undersigned attorneys, brings this Verified
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`Complaint against Defendants Grayscale Investments, LLC (“Grayscale”), Digital
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`Currency Group, Inc. (“DCG”), Michael Sonnenshein, and Barry Silbert
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`(collectively “Defendants”), and alleges as follows:
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`NATURE OF THE CASE
`This action arises out of Defendants’ brazen abuse of their control over
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`1.
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`nearly $19 billion of digital assets held in two trusts to enrich themselves at the
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`expense of trust shareholders. Due to Defendants’ malfeasance and refusal to allow
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`redemptions, the only way for shareholders to exit their investments is by selling
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`1
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`EFiled: Mar 06 2023 12:25PM EST
`Transaction ID 69272773
`Case No. 2023-0276-
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`their shares in the trusts in the secondary market, where shares are trading at a
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`fraction of their proportionate interest in trust assets. Meanwhile, with investor
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`capital trapped, Defendants have siphoned off over a billion dollars in fee income
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`over the last two years alone. As a significant trust shareholder, Alameda brings this
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`action for the benefit of its chapter 11 bankruptcy estate to recover the hundreds of
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`millions of dollars in harm that it is suffering at Defendants’ hands. Remedying the
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`harm to the Alameda debtor will also unlock approximately $9 billion or more in
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`value for over one million other trust shareholders, many of whom are small retail
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`investors that Defendants are continuing to exploit.
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`2.
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`The Grayscale Bitcoin Trust (the “Bitcoin Trust”) and Grayscale
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`Ethereum Trust (the “Ethereum Trust” and, together, the “Trusts”), are two
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`Delaware statutory trusts that Grayscale formed and manages for the ostensible
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`purpose of permitting investors to mimic investments in Bitcoin or Ether, without
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`being burdened by the complexities of holding digital assets themselves. The Trusts
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`were designed to accomplish this goal by issuing shares to investors that are backed
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`by a proportional interest in the Trusts’ portfolios, which are comprised entirely of
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`Bitcoin (for the Bitcoin Trust) and Ether (for the Ethereum Trust). As the sponsor
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`of the Trusts, Grayscale compensates itself with an annual “Sponsor’s Fee”
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`calculated as a percentage of the net asset value in the Trusts. The Sponsor’s Fee
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`2
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`that Grayscale has pocketed at the expense of the Trusts’ shareholders has
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`historically been 2% for the Bitcoin Trust and 2.5% for the Ethereum Trust.
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`3.
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`The fundamental investment objective for each of the Trusts is for the
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`value of issued shares to reflect the value of the Trusts’ Bitcoin and Ether holdings.
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`In this respect, the Trusts are similar to other “tracking funds” that allow investors
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`to gain exposure to commodities or other assets through investment in the fund rather
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`than the underlying commodity or assets themselves. These products appeal to
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`investors because they provide exposure to types of assets—such as gold, the entire
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`S&P 500 index, or digital currencies—that are difficult to invest in directly.
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`4.
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`For years, the Trusts proved to be very popular investments, especially
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`among retail investors seeking to capitalize on the appreciation of Bitcoin and Ether.
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`For much of their history, this popularity resulted in shares of the Trusts being in
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`such demand that they traded in the secondary market at prices reflecting a premium
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`to the value of Bitcoin and Ether in the Trusts’ portfolios. Exploiting this pricing
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`premium, Grayscale rapidly grew the Trusts through repeated issuances of new
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`shares backed by ever-expanding portfolios. By the end of 2020, the Bitcoin Trust
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`had grown to hold approximately 3.3% of the world’s Bitcoin while the Ethereum
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`Trust had grown to hold approximately 2.6% of the world’s Ether. And, as
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`Grayscale intended, its Sponsor’s Fees grew exponentially with this increase in the
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`Trusts’ holdings, hitting nearly $110 million in 2020.
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`3
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`5.
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`Starting in February 2021, the market for the Trusts started to change.
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`As competing products emerged with more favorable fee structures, demand for the
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`Trusts waned and their shares began trading at a discount to the value of the Trusts’
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`assets. Over the ensuing two years, that discount has widened to about 50%—
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`meaning the shares are trading at a price that is roughly half the value of the Bitcoin
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`and Ether that are backing them. Today, that discount equates to a loss in market
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`capitalization of over $6 billion for investors in the Bitcoin Trust (which presently
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`holds about $14 billion in Bitcoin) and nearly $3 billion for investors in the Ethereum
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`Trust (which presently holds about $5 billion in Ether). For the Alameda debtor
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`alone, the discount equates to a loss in the market value of its holdings in the Trusts
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`of over $250 million.
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`6.
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`The Trusts have a built-in mechanism to eliminate this discount. Under
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`the Trust Agreements,1 Grayscale can authorize share redemptions through which
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`1 The term “Trust Agreement” as used herein refers to the currently operative
`Bitcoin Trust agreement. The Bitcoin Trust agreement that Grayscale contends to
`be currently operative is the Fifth Amended and Restated Trust Agreement, dated
`September 12, 2018 (the “Fifth Amended Bitcoin Trust Agreement”), which is
`attached as Exhibit 1 hereto. However, as explained in Section III infra, due to
`Grayscale’s failure to obtain contractually required authorizations for certain
`amendments, the actual currently operative Bitcoin Trust agreement is the Third
`Amended and Restated Trust Agreement, dated January 1, 2016 (the “Third
`Amended Bitcoin Trust Agreement”), which is attached as Exhibit 2 hereto. For
`consistency and clarity, citations herein to provisions of the “Trust Agreement”
`reference the provisions and language used in the Fifth Amended Bitcoin Trust
`Agreement. In almost all instances, the Trust Agreement provisions cited herein are
`(footnote continued)
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`4
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`Trust investors could exchange their Bitcoin Trust or Ethereum Trust shares for their
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`corresponding interest in the underlying Bitcoin or Ether. By allowing these
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`redemption transactions, the Trusts can effectively tether the price of the Trusts’
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`shares to the value of the assets backing them, because shares trading below net asset
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`value will be purchased by arbitrageurs who will then exchange those shares for their
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`full, proportionate value in digital assets. As for the impact of Grayscale’s excessive
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`fee structure on the Trusts’ shareholders, the Trust Agreements included a fix for
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`that, too. They require that Grayscale monitor the Trusts’ fee structures and
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`negotiate competitive rates.
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`7.
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`Yet, possessed by self-interest, Defendants have shamelessly operated
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`the Trusts solely to maximize their own fee income, without regard to the impact on
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`the Trusts’ investors. Through this disloyal campaign of greed, Defendants have
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`secured over a billion dollars of fees for themselves while driving the trading prices
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`of the Trusts’ shares almost nine billion dollars below their intrinsic value. All of
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`materially identical in relevant respects to provisions in the Third Amended Bitcoin
`Trust Agreement (though section numbers may differ). Where there are substantive
`differences between the versions of the agreements—notably in respect of
`redemptions—they are noted and discussed. Similarly, the term “Trust Agreements”
`refers to the Trust Agreement together with the currently operative Ethereum Trust
`agreement, the Amended and Restated Trust Agreement, dated July 3, 2018 (itself
`the “Ethereum Trust Agreement”), which is attached as Exhibit 3 hereto. Likewise,
`while the section numbering may differ, the Trust Agreement provisions cited herein
`are materially identical in relevant respects to provisions in the Ethereum Trust
`Agreement, unless otherwise indicated.
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`5
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`this conduct is in flagrant breach of Defendants’ contractual and fiduciary duties to
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`Alameda and other trust investors.
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`8.
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`First, Grayscale has breached its obligations by failing to reduce the
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`fees it charges to the Trusts’ shareholders to commercially competitive levels. The
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`Trust Agreements require Grayscale to “[m]onitor all fees charged to the Trust” in
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`order to ensure that they are at “competitive rates” and, “if necessary, to renegotiate
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`the fee structure to obtain such rates.” The fees that Grayscale has been charging
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`are well in excess of “competitive rates.” Indeed, over the last two years alone,
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`Grayscale has usuriously charged over $1.3 billion to “manage” the Trusts’ affairs.
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`This amount, which is taken from the pockets of the Trusts’ shareholders, is wildly
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`incommensurate with the minimal services that Grayscale provides to the Trusts and
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`many multiples higher than what other managers charge to perform similar
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`functions.
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`9.
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`Second, Defendants have breached their obligations by failing to permit
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`investors to redeem their shares for the corresponding amounts of Bitcoin or Ether
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`that back those shares. Such a redemption program would immediately eliminate
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`the current market discount and is required by numerous obligations under the Trust
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`Agreements, including the requirement that Grayscale do everything “necessary to
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`carry out the purposes of the Trust,” one of which is providing for “redemptions of
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`Shares” where permissible. While Defendants have publicly contended that
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`6
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`regulations preclude implementation of a redemption program under current
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`circumstances, that is a false pretense. As Defendants have recently been forced to
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`admit, Regulation M under the federal securities laws provides regulatory approval
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`to implement redemptions in precisely the current context where there is no ongoing
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`share creation (as there has not been for either Trust for over two years). Defendants’
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`true motivation in refusing redemptions is to artificially hold their investors’ assets
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`hostage so as to protect Grayscale’s Sponsor’s Fees, which would be diminished by
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`investor redemptions that reduce the size of the Trusts.
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`10. Defendants’ failure to adjust Grayscale’s fees to competitive rates and
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`implement a redemption program places them in flagrant breach of multiple
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`provisions of the Trust Agreements, the implied covenant of good faith and fair
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`dealing, and their fiduciary duties to the Trusts’ beneficiaries. The Alameda debtor
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`brings this lawsuit seeking damages and to secure an injunction requiring Grayscale
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`to reduce its fees and offer redemptions and thereby remedy the harm that Alameda
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`and over a million other shareholders have suffered and continue to suffer as a result
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`of Defendants’ self-dealing.
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`PARTIES
`11. Plaintiff Alameda Research Ltd. is a corporate entity organized under
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`the laws of the British Virgin Islands and a shareholder in both of the Trusts. As
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`detailed further herein, Alameda and numerous of its affiliates (the “FTX Debtors”)
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`7
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`are in chapter 11 bankruptcy proceedings in the United States Bankruptcy Court for
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`the District of Delaware before Judge John Dorsey. While Alameda was previously
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`part of the cryptocurrency hedge fund and trading enterprise infamously managed
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`by Sam Bankman-Fried, it is today a chapter 11 debtor in possession managed by an
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`independent CEO and board of directors, acting for the benefit of the FTX Debtors’
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`customers and other creditors, pursuant to the Bankruptcy Code and under the
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`jurisdiction of the Bankruptcy Court.
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`12. Defendant Grayscale is a limited liability company organized under the
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`laws of the State of Delaware. As detailed further herein, Grayscale established and
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`acts as Sponsor for the Trusts.
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`13. Non-party Grayscale Bitcoin Trust is a Delaware statutory trust
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`established by Grayscale on September 13, 2013 to hold Bitcoin, issue shares to
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`certain authorized investors, and redeem those shares in certain circumstances as
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`explained more fully below. Shares of the Bitcoin Trust are traded under the ticker
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`symbol “GBTC.”
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`14. Non-party Grayscale Ethereum Trust is a Delaware statutory trust
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`established by Grayscale on December 13, 2017 to hold Ether, issue shares to certain
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`authorized investors, and redeem those shares in certain circumstances as explained
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`8
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`more fully below. Shares of the Ethereum Trust are traded under the ticker symbol
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`“ETHE.”2
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`15. Defendant DCG is an investment corporation organized under the laws
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`of the State of Delaware and the parent company of Grayscale. Grayscale describes
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`DCG as sitting “at the epicenter of the blockchain industry.” Among other roles,
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`DCG wholly owns and is the sole member of Grayscale and owns non-party Genesis
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`Global Trading, Inc. (“Genesis”). Genesis is a broker-dealer that served, until
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`recently, as the sole “Participant” permitted to engage in creation or redemption
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`transactions for the Trusts.
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`16. Defendant Michael Sonnenshein is an individual who, on information
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`and belief, is a domiciliary of Connecticut. Mr. Sonnenshein has been employed by
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`Grayscale for nearly a decade. He was Managing Director of Grayscale from 2018
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`to January 2021 and, since January 2021, has acted as Grayscale’s Chief Executive
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`Officer.
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`17. Defendant Barry Silbert is an individual who, on information and
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`belief, is a domiciliary of Connecticut. Mr. Silbert is the founder and current
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`Chairman of the Board of Grayscale and was its Chief Executive Officer until
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`2 Typically and herein the word “Ethereum” is used to refer to the blockchain
`on which the digital asset “Ether” is the native currency. Grayscale, however, from
`time to time uses the word “Ethereum” to refer to the digital asset Ether, including
`in the name of the Ethereum Trust.
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`9
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`January 2021. He is also the founder and current Chief Executive Officer of DCG
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`and the founder of non-party Genesis.
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`JURISDICTION AND VENUE
`18. Because Plaintiff asserts equitable claims and seeks equitable remedies,
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`this Court has subject matter jurisdiction under 10 Del. C. §§ 341 and 342 as Plaintiff
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`has no adequate remedy at law. This Court further has jurisdiction over this matter
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`pursuant to 12 Del. C. § 3804(g). This Court has subject matter jurisdiction over
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`Plaintiff’s claims for declaratory relief pursuant to 10 Del. C. § 6501. Ancillary
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`jurisdiction over Plaintiff’s remaining claims is proper because all of Plaintiff’s
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`claims arise out of the same controversy.
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`19. Personal jurisdiction over Defendants is proper. Grayscale is a
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`Delaware limited liability company and DCG is a Delaware corporation. Mr.
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`Sonnenshein is the CEO of Grayscale, and this Court may exercise personal
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`jurisdiction over him pursuant to 6 Del. C. § 18-109(a). Mr. Silbert is the CEO of
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`DCG, the Chairman of the Board of Grayscale, and the former CEO of Grayscale,
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`and this Court may exercise personal jurisdiction over him pursuant to 6 Del. C.
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`§ 18-109(a) and 10 Del. C. § 3114(b).
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`10
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`I.
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`FACTS
`IN A PERVERSION OF THE TRUST AGREEMENTS, GRAYSCALE
`CREATES A PERPETUAL ONE-WAY FEE MACHINE
`A.
`Grayscale Creates The Trusts To Offer Tradeable Shares That
`Track The Price Of Bitcoin And Ether
`In 2013, when the Bitcoin Trust was founded, investors seeking
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`20.
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`exposure to Bitcoin and other cryptocurrencies faced a variety of logistical and
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`regulatory hurdles. Acquiring and maintaining custody over Bitcoin involved
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`unique challenges, and the legal status of digital assets remained uncertain.
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`21. Grayscale established the Bitcoin Trust to address these barriers. Its
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`straightforward idea was to offer investors economic exposure to Bitcoin while
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`sparing them the custody and legal difficulties attendant to direct ownership. Unlike
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`Bitcoin itself, Bitcoin Trust shares can be held directly in brokerage and retirement
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`accounts, or investors can secure indirect exposure to trust shares through mutual
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`funds and exchange traded funds (“ETFs”). In 2017, Grayscale founded the
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`Ethereum Trust to serve the same purpose with respect to Ether, the second-most
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`popular cryptocurrency.
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`22. From
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`the Bitcoin Trust’s
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`inception, Grayscale has repeatedly
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`represented to existing and prospective shareholders that the fundamental
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`investment objective of the Trust “is for the Shares to reflect the performance of the
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`value of [B]itcoin.” Likewise, from the Ethereum Trust’s inception, Grayscale has
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`repeatedly represented to existing and prospective shareholders that “[t]he Trust’s
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`11
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`investment objective is for the Shares (based on [Ether] per share) to reflect the value
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`of [Ether] held by the trust[.]” In other words, the market cap value of all the Bitcoin
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`Trust’s shares should track the market value of the Bitcoin Trust’s Bitcoin holdings,
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`the Trust’s net asset value (“NAV”). Similarly, the Ethereum Trust’s market cap
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`value was intended to track the market value of the trust’s Ether holdings.
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`23. The Trusts use a simple model to pursue this objective. Unlike a hedge
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`fund or other investment vehicle that employs professionals to identify and cultivate
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`investments, the Trusts are not actively managed. Instead, they are set up as
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`Delaware statutory trusts designed to do only three things: accept Bitcoin or Ether
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`for shares, hold Bitcoin or Ether as passive investments, and accept shares for
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`Bitcoin or Ether. Trust Agreements § 1.5. Each share the Trusts issue represents a
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`fractional interest in the respective Trust corpus. The Trusts grow when Bitcoin or
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`Ether are deposited in exchange for shares—a “creation” transaction—and shrink
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`when shares are deposited in exchange for Bitcoin or Ether—a “redemption”
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`transaction. Once created, shares are sold on the secondary market to both retail and
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`institutional investors.
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`24. The management structure of the Trusts has remained relatively
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`constant since inception. The Trusts have a Trustee (Delaware Trust Company), but
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`the Trustee has delegated functionally all of its obligations and responsibilities to
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`12
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`each Trust to a “Sponsor,”3 which is and always has been Grayscale. Trust
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`Agreements § 2.2 (“the duty and authority to manage the affairs of the Trust is vested
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`in the Sponsor”). The Trustees are thus mere figureheads that have assigned all
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`responsibility for managing the Trusts’ affairs to Grayscale. Trust Agreements § 6.1
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`(vesting authority to manage Trust in Sponsor).
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`25. The Sponsor’s role is to oversee the Trusts, carry out the Trusts’
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`purposes for the benefit of shareholders, and protect Trust shareholders’ rights. The
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`Trust Agreements charge the Sponsor with certain general responsibilities,
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`including:
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`Managing the Trusts as is “necessary to carry out the purposes of the
`Trust[s],” Section 6.3(a);
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`Always acting “with integrity and good faith” and exercising “due
`diligence in all activities relating to the Trust[s] and in resolving
`conflicts of interest[,]” Section 6.3(j);
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`Fiduciary responsibility for the “safekeeping and use of the Trust
`Estate[s],” Section 6.3(h); and
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`Not employing “the Trust Estate[s] in any manner except for the
`benefit of the Trust[s],” including not using the Trust Estates “for the
`exclusive benefit of the Sponsor[,]” Section 6.3(i).
`26. The Trust Agreements also charge the Sponsor with taking certain
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`specific actions including, as also discussed further herein:
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`3 Unless otherwise indicated, the term “Sponsor” as used herein means
`Grayscale as Sponsor of both Trusts.
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`13
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`Executing and filing all documents and doing “any and all other
`things as may be appropriate” for the “qualification and operation of
`the Trust[s] and for the conduct of its affairs[,]” Section 6.3(b);4 and
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`Monitoring the fees that service providers charge the Trusts and
`renegotiating contracts, if necessary, to ensure that services are
`provided “at competitive rates and are the best price and services
`available under the circumstances,” Section 6.3(g).
`27. Beyond
`these charges,
`the Sponsor’s day-to-day managerial
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`responsibilities are minimal relative to the role of typical investment fund managers.
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`The Trust Agreements direct the Sponsor to engage service providers such as
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`accountants and attorneys, as well as a Custodian charged with the safekeeping of
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`the assets held in the Trusts. Trust Agreements §§ 6.2, 6.3. The Trusts’ present
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`Custodian is third party Coinbase Custody Trust Company, LLC. But the Sponsor
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`has no responsibility for allocating, trading, or investing the Trusts’ assets, all of
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`which enter the Trusts in the form of Bitcoin and Ether, and at all times remain
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`invested in Bitcoin and Ether.
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`28.
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`In exchange for its limited management responsibilities, Grayscale
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`arranged for the Sponsor of the Bitcoin Trust (i.e., itself) to receive a fee that accrues
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`daily at an annual rate of 2.0% (the “Sponsor’s Fee”),5 and is taken from the
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`4 Section 6.3(b) of the Third Amended Trust Agreement is nearly identical,
`referring to the Trust’s “business” rather than its “affairs.”
`5 Unless otherwise indicated, the term “Sponsor’s Fee” as used herein refers
`to the 2.0% fee charged by Grayscale on the Bitcoin Trust, and the term “Sponsor’s
`Fees” refers collectively to the Sponsor’s Fee and the 2.5% fee charged by Grayscale
`to the Ethereum Trust.
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`14
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`
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`shareholders monthly. Trust Agreement § 6.8(a)(i). For the Ethereum Trust, that
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`fee is 2.5%. Ethereum Trust Agreement § 6.8(a)(i). Importantly, the Sponsor’s Fees
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`are calculated based on the market value of each Trust’s assets (i.e., the value of the
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`Bitcoin or Ether held by the trust), regardless of the market value of the shares. Id.
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`Thus, Grayscale has strong incentives to maximize the amount of assets in the
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`Trusts. In the halcyon days of 2021, when Bitcoin reached over $60,000 per token,
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`Grayscale earned fee income from shareholders worth nearly $620 million in
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`exchange for its limited oversight responsibilities. All told, over the past two years,
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`Grayscale has earned more than $1.3 billion for managing the Trusts, and even more
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`for managing twelve other single-digital-asset trusts that it runs in parallel.
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`29. Given the Trusts’ lack of active management, the Trust Agreements
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`provide for two mechanisms that can work to ensure that the Trusts’ share prices
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`actually track the value of the Trusts’ asset holdings as intended: share creation and
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`redemption. Share creations, which involve depositing Bitcoin or Ether in the Trusts
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`in exchange for shares, can help regulate excessive market premiums. Conversely,
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`share redemptions, which involve delivering shares to the Trusts in exchange for
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`Bitcoin or Ether, can help regulate any excessive market discounts. Indeed, the Trust
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`Agreements identify the primary two “purposes of the Trust” as being “to accept
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`Bitcoin [or Ether] for subscriptions of Shares” and “to distribute Bitcoin [or Ether]
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`(or cash from the sale of Bitcoin [or Ether]) upon redemption of Shares” when
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`15
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`permissible. Trust Agreements § 1.5(a). Without such mechanisms, temporary
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`differences in the supply-and-demand dynamics of the shares on the one hand and
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`the underlying asset on the other would become entrenched, distorting the Trusts’
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`share prices away from the value of their claims on the Trust corpuses.
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`B.
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`30.
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`Grayscale Lures Retail Investors Into The Trusts And
`Continues The Expansion Of Its Portfolio
`Incentivized by its NAV-based Sponsor’s Fees, Grayscale has worked
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`tirelessly over the years to increase the size of the Trusts’ shareholder base.
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`31.
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`In May 2015, the Bitcoin Trust succeeded in listing its shares on the
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`over-the-counter interdealer quotation system OTCQX Best Marketplace. This
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`marked a significant step forward in the public availability of Trust shares by
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`enabling investors—including retail investors—to “easily trade” with the “diverse
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`network of broker-dealers that provide liquidity and execution services” on OTCQX
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`through “the broker of their choice.”
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`32. Fortunately for Grayscale, the share price exhibited a persistent
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`premium to the NAV from 2015 until early 2021, which meant there was demand
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`only for creation transactions which allowed the Trust to grow rapidly. The Bitcoin
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`Trust consequently doubled in size from 2014 to 2019.
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`33.
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`In 2019 and 2020, to further enlarge the Trusts and increase its fees,
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`Grayscale financed an aggressive mass marketing campaign to extoll the Trusts’
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`virtues to potential investors. Grayscale’s campaign “#DropGold” sought to
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`16
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`convince gold investors that Bitcoin was a superior store of value and hedge against
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`inflation. Sonnenshein declared that Grayscale was “going after a narrative around
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`gold being where investors should go when markets turn south” and “highlighting
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`the absurdity of gold.” Grayscale also represented that reallocating investments
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`from gold to Bitcoin could create “an annualized return that was over 5% higher than
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`that of a pure gold allocation, with lower volatility.”
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`34. Grayscale’s advertising blitz also swept the airwaves with TV
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`commercials aimed at capturing a share of the pandemic-era retail investment frenzy.
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`A 30-second commercial implied that digital assets were the next evolution in the
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`history of money, and that it was time for investors to “go digital; go Grayscale.”
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`Another 42-second commercial asked investors “Why did you invest in gold? Are
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`you living in the past? . . . Digital currencies like bitcoin are the future . . . and unlike
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`gold, they actually have utility. Leave the pack behind: it’s time to drop gold.”
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`35. None of these advertisements disclosed that Bitcoin Trust shares had
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`persistently traded at a premium of more than 10% to NAV, meaning that retail
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`purchasers who saw Grayscale’s ads and bought shares on the secondary market paid
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`a significant premium for the fractional interest in the Bitcoin Trust’s Bitcoin
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`holdings that the shares represented. Amidst a wave of growing enthusiasm for
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`Bitcoin and other digital assets, demand for the Bitcoin Trust’s shares on the
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`17
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`secondary market remained strong enough for the premium to persist into early
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`2021.
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`36. By the end of the first quarter of 2021, the Bitcoin Trust held an
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`astounding 654,600 Bitcoins—nearly one-and-a-half times the number it held on
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`January 1, 2020. As of December 31, 2022, the Bitcoin Trust held fully 3.3% of all
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`Bitcoin in the world. Chart 1 below shows the dramatic growth in the size of the
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`Bitcoin Trust over time. Grayscale, meanwhile, benefitted by earning ever-higher
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`Sponsor’s Fees from the expanded asset base.
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` Nor was the Bitcoin Trust Grayscale’s only pandemic-era cash cow.
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`37.
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`From 2013 to 2016, the price of Bitcoin was below $1,000. In 2017, the price rose
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`exponentially, reaching nearly $20,000 by the end of the year. This meteoric rise
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`18
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`captured widespread public attention, which Grayscale promptly sought to capitalize
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`on by expanding its product offerings. In December 2017, Grayscale launched the
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`Ethereum Trust and, as shown above in Chart 1, it likewise took off during the
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`pandemic. Grayscale also created more than a dozen other trusts based upon other
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`digital assets such as Litecoin and Filecoin.
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`38. For Grayscale’s expansion campaign, the music stopped in February
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`2021, when the years-long premium the Trusts had exhibited suddenly shifted to a
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`discount. As more competitors entered the market offering lower fees, and owning
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`Bitcoin and Ether directly became easier and cheaper—which Grayscale long
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`foresaw would happen—shares in the Trusts began to trade at a significant discount
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`to the underlying NAV per share. As digital asset prices then began to fall in late
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`2021, the discount deepened and has continued to do so, as shown in Chart 2 below.6
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`As of March 3, 2023,7 the Bitcoin Trust’s shares were trading at a 45% discount to
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`the NAV per share and the Ethereum Trust’s shares were trading at a 54% discount.
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`6 Shares in the Ethereum Trust reflected the same trading pattern, although
`their premium in the early years after the Ethereum Trust was established was at
`times far higher.
`7 All figures appearing herein are current as of the March 3, 2023 market close
`unless otherwise indicated.
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`19
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`39. Nonetheless, this poor secondary-market share performance proved no
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`impediment to Grayscale capturing fee revenue from shareholders at an accelerating
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`rate. As shown below in Chart 3, from January 2021 to the end of 2022, Grayscale’s
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`cumulative Sponsor’s Fee income from the Trusts grew by more than 700% from
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`about $190 million to over $1.5 billion.
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`20
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`II. GRAYSCALE BREACHES ITS CONTRACTUAL OBLIGATION TO
`ENSURE IT IS PAID ONLY AT COMPETITIVE RATES
`40. Among other obligations to shareholders, the Trust Agreements
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`expressly require Grayscale to “[m]onitor all fees charged to the Trust[s], and the
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`services rendered by the service providers to the Trust[s], to determine whether the
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`fees paid by, and the services rendered to, the Trust[s] are at competitive rates and
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`are the best price and services available under the circumstances, and if necessary,
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`renegotiate the fee structure to obtain such rates and services for the Trust[s].” Trust
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`Agreements § 6.3(g).8
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`8 Other more general provisions of the Trust Agreements also require
`Grayscale to ensure for the benefit of shareholders that the Trusts’ assets are not
`depleted through payment of excessive fees. For example, Grayscale has the
`responsibility for “safekeeping . . . of the Trust Estate” and to “[n]ot employ or
`(footnote continued)
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`21
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`41. The fees that Grayscale must ensure are at “competitive rates” include
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`Grayscale’s own Sponsor’s Fees—which, at the Trusts’ inception, Grayscale set at
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`an annual rate of 2.0% (for the Bitcoin Trust) and 2.5% (for the Ethereum Trust),
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`accruing daily and paid monthly in Bitcoin and Ether. Trust Agreements § 6.8(a)(i).
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`Given the structure of the Trusts, these fees directly reduce each Trust shareholder’s
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`interest in the Trusts and are, in effect, paid by Alameda and the Trusts’ other
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`shareholders. On its website, Grayscale explicitly lists itself at the top of a list of
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`“Service Providers” for each of the Trusts. Its Sponsor’s Fees thus fall squarely
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`within “fees charged to the Trust[s]” by “service providers to the Trust[s].”9 Yet
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`Grayscale has utterly failed to satisfy its monitoring and renegotiation obligations
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`with respect to the Trusts’ Sponsor’s Fees.
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`42. As the Trusts’ discount to NAV widened over the course of 2021,
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`investor interest in the Trusts waned. Many investors liquidated their positions on
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`the secondary market at substantial losses. Others opted to invest instead in
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`permit others to employ the Trust Estate in any manner except for the benefit of the
`Trust” including preventing it from being used “for the exclusive benefit of the
`Sponsor.” Trust Agreements § 6.3(h), (i).
`9 The fact that Grayscale was expected to be in a position of regulating its own
`conduct, even in regard to such things as fees, is supported by the Trust Agreements’
`conflict-of-interest provisions which set forth standards for such situations that
`require Grayscale to always act with “integrity and good faith” and to consider not
`only its own interests whenever such a conflict arises, but the “relative interest of
`each party” impacted as well as “customary or accepted industry practices.” Id.
`§§ 6.3(j), 6.6(b).
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`
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`22
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`competing digital asset trusts or exchange-traded products (“ETPs”) that offer
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`various types of exposure to Bitcoin or Ether.10 Every single one of these competing
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`trusts and products offers significantly lower management fees on a percentage
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`basis, and accepts astronomically lower profit margins on a USD basis.
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`43. Advisers to trusts that hold Bitcoin directly (so-cal