July 10, 2024 at 14:51 GMTModified date: July 10, 2024 at 14:51 GMT
July 10, 2024 at 14:51 GMT

Bitwise accused of misleading practices in $2M lawsuit

The lawsuit, filed in New York County, alleges that Bitwise misled investors regarding its Bitwise Hold 10 Private Index Fund (BITW).

Bitwise accused of misleading practices in $2M lawsuit

Bitwise Asset Management, a prominent player in the cryptocurrency investment sector, is currently embroiled in a legal battle with Vandelay Industries, which is representing the Mukamal family.

This family consists of a retired nurse and her two sons: Theodore Mukamal, a lawyer, and Andrew Mukamal, a fashion stylist.

The lawsuit, filed in New York County, alleges that Bitwise misled investors regarding its Bitwise Hold 10 Private Index Fund (BITW).

The plaintiffs claim they suffered significant financial losses due to misrepresentations and deceptive practices by Bitwise executives.

Understanding the allegations

The core of the lawsuit revolves around allegations of deceptive practices and mismanagement by Bitwise Asset Management. 

According to the complaint, filed documents assert that Theodore Mukamal and Vandelay Industries initially invested $1.3 million in the Bitwise Hold 10 Private Index Fund in early 2018. 

They were attracted by the fund’s promises of expert management and diversification within the volatile cryptocurrency market.

However, tensions escalated in 2020 when Bitwise proposed converting the fund into a statutory trust and making its shares tradable over the counter (OTC). 

This transition allegedly occurred during a market downturn, which the plaintiffs claim limited their investment options and resulted in financial losses. 

In 2021, the Mukamals reinvested $4.85 million under new terms, believing they would have access to private redemptions. 

They allege that these redemptions were unavailable, and they were forced to sell their shares below net asset value (NAV) in February 2024. This then resulted in nearly $2 million in losses.

A ‘negligent pump and dump’ scheme

Theodore Mukamal stated in a recent note that Bitwise executives, including CEO Hunter Horsley and CIO Matt Hougan, engaged in what he described as a ‘reckless and negligent pump and dump’ scheme. 

He alleged that this scheme was executed for the personal benefit of Bitwise executives, leading to BITW shares consistently trading below NAV for an extended period. 

The lawsuit further claims that Bitwise failed to disclose crucial information regarding the fund’s liquidity and implemented unjustified increases in management fees.

It asserts claims of breach of fiduciary duty, negligence, fraud, and violations of securities laws against Bitwise and its executives. 

These allegations question the integrity of Bitwise’s management practices and seek damages amounting to over $2 million.

Liquidation controversy

A significant point of contention in the lawsuit is Bitwise’s handling of share liquidation. In November 2020, Bitwise initiated a campaign to liquidate shares, encouraging investors to sell at premiums above NAV. 

The plaintiffs argue that this strategy was self-serving and contributed to their financial losses, alleging that it violated agreements and harmed investors’ interests. 

The lawsuit cites multiple breaches of the SEC Act of 1934 and other regulatory violations.

The legal battle underscored broader concerns within the cryptocurrency investment industry about transparency, investor protection, and the responsibilities of asset management firms during periods of market volatility. 

Bitwise, valued at $500 million in 2021 and managing approximately $3 billion in assets, has garnered support from influential investors.

This includes big names like that of Daniel Loeb and Stanley Druckenmiller, which adds complexity and public interest to the proceedings.

In response to the allegations, a spokesperson for Bitwise dismissed the claims as baseless, citing Theodore Mukamal’s history of legal threats. 

They also asserted that he had signed documents acknowledging the risks associated with Bitwise’s digital asset funds. They said:

“Theodore Mukamal, who also refers to himself as Tootsie Warhol, is an experienced accredited investor who has been profitably investing in digital assets with Bitwise since 2018. He has repeatedly signed documents confirming that he understands and accepts the risks and details of the Bitwise digital asset funds he chose to invest in. Earlier this year he reached out to Bitwise threatening to sue and smear Bitwise’s reputation in the press unless he was paid a large sum of money. 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.”

Bitwise now intends to vigorously dispute the allegations in court.