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

According to a newly disclosed agreement, FTX debtors will allocate up to $230 million from government forfeiture proceedings to preferred shareholders. Since the agreement was finalized after the deadline for FTX creditors to vote on the claims plan and was not disclosed until 30 days later, some creditors were surprised and outraged. In bankruptcy proceedings, creditors typically get paid before shareholders. Before the August 16 voting deadline, creditors overwhelmingly voted to approve the plan, but they were unaware of this provision. "The general creditors were not involved," said Sunil Kavuri, the representative of the largest FTX creditor group, "and my FTX clients are furious, feeling they have been cheated and robbed by the FTX estate again." FTX debtors stated that compensating preferred shareholders would help avoid high litigation costs and delays related to forfeiture proceeds. As part of the agreement, the FTX estate led by Sullivan and Cromwell will allocate 18% of the government forfeiture proceeds, up to $230 million, to a special fund for the "exclusive benefit" of certain shareholders. Although the agreement was officially executed on August 28, nearly two weeks after the creditors' voting deadline on the plan, the agreement was not disclosed until September 27-30, which was the last day the FTX estate was allowed to submit the amended plan. "The debtors and preferred shareholders have an interest in avoiding the costs, fees, and delays associated with litigation over the plan and forfeiture proceeds," the document argued. The FTX estate did not immediately respond to a request for comment. In a June filing, the FTX estate estimated the value of the government forfeiture proceeds at around $1.19 billion, of which 18% or $214.2 million would be within the $230 million range specified in the agreement. The plan also provides for up to $250,000 in legal fees per shareholder to be paid through a segregated fund.