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Bitwise Investors Sue Over Alleged Crypto Fund Pump and Dump Scheme

Last Updated 7 hours ago
James Morales
Last Updated 7 hours ago

Key Takeaways

  • A wealthy New York family has sued Bitwise for allegedly misleading them about a crypto index fund they invested in.
  • The Mukamals claim they have been damaged by $1.9 million because of Bitwise’s “false and materially misleading statements and omissions of material facts.”
  • Bitwise has denied the allegations and intends to dispute the charges.

As one of just 3 asset managers to have listed a spot Bitcoin Exchange Traded Funds (ETFs) on the New York Stock Exchange, Bitwise has been a major beneficiary of an ongoing crypto ETF boom. 

But after an otherwise successful 2024, the firm’s reputation is now threatened by a lawsuit  accusing the firm and its leadership of “egregious, self-serving and wrongful actions.” 

Wealthy New York Family Accuse Bitwise of Fraud

The complaint against Bitwise was filed in a New York court on Monday, July 8, by companies controlled by the Mukamals, a wealthy New York family who injected $1.3 million into the Bitwise HOLD 10 Private Index Fund.

According to the allegations, CEO Hunter Horsley and other Bitwise executives fraudulently deceived investors, selling the fund as a private investment opportunity in 2018, only to convert it to an over-the-counter (OTC) trading model in 2020.

“Until that point, the Fund had never disclosed its intention to trade via OTC; indeed, Plaintiffs chose to invest in the Fund based specifically upon the representation that their investment would be privately placed and privately redeemable,” the lawsuit states.

Accusations of Coercion

Upon hearing that HOLD 10 would be converted to OTC trading under the new ticker, BITW, the Mukamals claim Horsley coerced them into selling shares in the fund to provide liquidity.

“Horsley misled Theodore [Mukamal] by stating that BITW was still accepting private placements and omitted that, even though Theodore’s new investment would be privately placed, he would only be able to sell via OTC,” the complaint alleges. 

It also accuses him of misleading investors “by omitting the severe tax consequences they would incur by following his instructions.”

Bitwise’s decision to convert the fund to OTC trading seems to have been against the wishes of some of the company’s investors. Which begs the question: what was the advantage?

According to the Mukamals’ lawsuit, the switch was part of a “pump and dump” scheme by which the initial capital provided by investors artificially inflated the price of shares in the fund above its net asset value (NAV).

A Multi-Million Dollar Pump and Dump?

In the world of crypto, the phrase pump and dump is usually associated with low-capitalization meme coins and dubious celebrity endorsements. But of course, the basic strategy has been used on all kinds of assets.

In the case of Bitwise, disgruntled investors claim the company’s CEO “used these aggressive and solely self-serving tactics” to pressure them into selling and reinvesting in the new fund.

“Defendants pursued this risky “pump and dump” scheme to create an initial “pop” in the OTC markets and then leave Fund investors consistently under water, as the Fund has consistently traded 35-40% below the NAV for three years.”

As alleged in the complaint, by Spring of 2024, the Mukamals had finally had enough and closed their position in BITW at an average value of $35.40 per share. During this time, they claim the fund’s NAV stood at an average value of $54.45 per share.

From an initial investment of $4.85 million in 2021, the family recouped $3.5 million three years later. However, they claim that had the fund remained private and they weren’t forced to sell OTC, their investment would have been worth $5.5 million at the NAV.

Bitwise Disputes Claims

In a statement shared with CCN, a spokesperson for Bitwise denied the charges of fraud, arguing that Theodore Mukamal, “signed documents confirming that he understands and accepts the risks and details of the Bitwise digital asset funds he chose to invest in.”

Moreover, the company claims Mukamal reached out to them earlier in the year threatening to sue unless he was paid a large sum of money, adding that “Theodore has a history of threatening and suing other people, former employers, and companies to pursue personal gain.”

“We believe his claims are utterly without merit and we intend to dispute them vigorously. We expect to refute his false allegations,” the statement concluded.

The Case for ETFs

If there is one thing to take away from the HOLD 10/BITW case, it is that OTC crypto funds in the pre-ETF era were a ripoff. 

Compared to ETFs, such funds are subject to high fees and unfavorable tax treatment. Meanwhile, the innate volatility created by low liquidity makes it impossible for all but the largest funds to trade efficiently. 

Even Grayscale’s massive Bitcoin Trust, which was the largest crypto fund in the world before it was usurped by Blackrock’s Bitcoin ETF, traded at as much as a 40% discount to the value of assets it held. (Since converting to an ETF, the Grayscale premium has shrunk much closer to its 1.5% management fee.)

For its part, Bitwise’s BITB has emerged as one of the top 5 Bitcoin ETFs in the US, with around $2.18 billion in assets. The company is well placed to benefit from an expanding market for crypto investment products and will likely be one of the first asset managers to list a spot Ethereum ETF, potentially as soon as this week.

But if the allegations made in Monday’s lawsuit are true, investors may question the company’s credibility and the integrity of its CEO. 

Index funds that track a basket of cryptocurrencies have traditionally been difficult to access in public markets. If regulators open the way for ETFs to hold a greater variety of crypto assets, something like BITW but in an ETF wrapper could be a hit.

However, investors must be able to trust Bitwise before they put money into any such vehicle. And yet, in comments made to CCN, Theodore Mukamal accused the company of “devastating thousands of investors who wrongfully placed their trust in Bitwise.” 

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