FTX plans to allocate up to $230 million from government seizure proceeds to preferred shareholders, sparking dissatisfaction among creditors

Under a newly disclosed agreement, FTX debtors will set aside up to $230 million for preferred shareholders from government seizure proceedings. Because the agreement was finalized after a deadline for FTX creditors to vote on a claims plan and released 30 days later, it surprised and angered some creditors. In bankruptcy proceedings, creditors are typically paid before shareholders. Creditors voted overwhelmingly to approve the plan before the August 16 voting deadline, but they were unaware of the provision. “General creditors did not participate,” said Sunil Kavuri, a representative of the largest FTX creditor group. “My FTX clients who are concerned have expressed that they feel they have been deceived and robbed by FTX estate again.” FTX debtors said compensating preferred shareholders will help avoid high litigation costs and delays associated with seizure proceeds. As part of the agreement, FTX estate, led by law firm Sullivan and Cromwell, will put 18% of the proceeds from the government seizure action into a special fund for the “proprietary benefit” of certain shareholders, totaling up to $230 million. While the agreement was formally executed on August 28, nearly two weeks after the deadline for creditors to vote on the plan, it was not disclosed until September 27-30, the last day FTX Estate was allowed to file an amended plan, according to the agreement. “The debtors and preferred stockholders have an interest in avoiding the costs, expenses and delays associated with litigation related to the plan and the disgorgement of proceeds,” the filing argues. FTX Estate did not immediately respond to a request for comment. In a June filing, FTX estate estimated the proceeds from the government’s forfeiture actions: approximately $626 million seized from Emergent entities (used to purchase Robinhood shares), approximately $379 million in fiat and digital assets “obtained from certain accounts at third-party cryptocurrency exchanges” (as of June), “approximately $150 million in cash seized from accounts registered in the name of FTX DM,” and “two private jets purchased…using approximately $35 million in estate assets.” Total, the value of the seized assets as of June is approximately $1.19 billion, of which 18% is $214.2 million, which is within the reasonable range of the $230 million stipulated in the agreement. The plan also provides for each shareholder to receive up to $250,000 in legal fees, to be paid through a segregated fund. (The Block)