Wealthy Investors Rescued Juul From Bankruptcy. Others Are Crying Foul.

It was a deal that preserved the equity investments of Nick Pritzker and Riaz Valani, cemented their influence over the company and secured them releases from liability in thousands of lawsuits against Juul. Now Juul is fighting a lawsuit from a group of investors alleging that those two directors were looking out for their own interests, not the company’s.

Among the questions in dispute is whether the bailout that allowed Juul to avert bankruptcy in 2022 benefited insiders at the expense of other investors.

The allegations have come to light as the company is trying to raise new capital, become profitable for the first time and turn the page after a turbulent year-and-a-half.

Juul says that it delegated decisions to independent directors and that it secured needed financing from investors who support the company’s mission of offering adult cigarette smokers a less-harmful alternative.

Juul was once a vaping juggernaut and one of the most valuable startups in America. Tobacco giant Altria Group in 2018 invested $12.8 billion in Juul. Juul used nearly all of the cash from Altria’s investment to fund employee bonuses and shareholder dividends, including more than $2 billion to Valani and more than $1 billion to Pritzker, The Wall Street Journal has reported.

Since then, Juul has been beset by thousands of lawsuits over its marketing practices and embroiled in a dispute with federal regulators over whether its e-cigarettes can be sold in the U.S. Juul has denied allegations that it marketed its e-cigarettes to children and teens.

Juul began exploring bankruptcy in June 2022, when the Food and Drug Administration ordered its e-cigarettes off the market and a court stayed the order. By September 2022, according to people familiar with the matter, Juul’s top executives agreed that bankruptcy was the likeliest outcome. The start of Juul’s first bellwether trial was looming, and the company was struggling to raise money to settle outstanding lawsuits while its products remained in regulatory limbo.

In board meetings and in conversations with the CEO, Pritzker and Valani argued that the company shouldn’t file for bankruptcy and offered it a bailout instead, these people said. Pritzker and Valani were early Juul investors and have long been powerful members on its board.

As the bailout was being discussed, Juul’s chief executive and top lawyer raised concerns internally about potential conflicts of interest facing Pritzker and Valani, according to the people familiar with the matter. Valani continued to press the case against bankruptcy to CEO K.C. Crosthwaite while Juul interviewed candidates for a special board committee to oversee the company’s next steps, these people said.

The bailout was done in three parts. Pritzker and Valani in September 2022 refinanced a Juul term loan and later that fall loaned Juul more money to cover operating costs. Finally, the two directors, along with Juul co-founders James Monsees and Adam Bowen, backstopped a sweeping legal settlement and made an equity investment in Juul. Pritzker, Valani and the co-founders, who were named as co-defendants in many of the lawsuits, have denied wrongdoing.

Juul, after approaching dozens of potential investors, closed a funding round in October 2023 that raised $1.27 billion. That sum included money that entities connected to Pritzker, Valani, and Juul’s two co-founders committed for Juul’s legal settlement and an additional $45 million from the same four investors.

Entities tied to Valani and Pritzker now own nearly half of Juul, while most other investors have had their stakes sharply diluted amid the rescue.

Affiliates of hedge fund D1 Capital Partners and two other investors sued Juul in October 2023 to block a debt conversion triggered by the funding round. The conversion would slash $2 billion in outstanding notes to $116 million in equity, a 94% drop in value, according to Juul.

The lawsuit alleges that Pritzker and Valani “leveraged a distressed situation for their own personal gain to the detriment of Juul’s other stakeholders."

Juul said that its management never decided that bankruptcy was the best path. The company said its actions over the past year-and-a-half were far better than the alternative—bankruptcy—which could have wiped out all shareholders’ equity. Since 2022, Juul has settled nearly all of its remaining legal liabilities and cut expenses, including roughly halving its employee head count.

The company said its board avoided conflicts of interest by bringing on two independent directors with restructuring experience to form a special committee. In a statement, the committee said it assessed the company’s options with the assistance of separate legal advisers, and made decisions that maximized the company’s value.

Altria’s 2018 investment had set Juul’s share price at $279. The investment round that closed in October put it at $1.07.

Juul’s CEO told employees at an internal meeting in November that they would receive equity awards—the way new employees do when they join a startup—to compensate for the dilution in their shares.

“I believe that we’ve got significant value we can go build from here," Crosthwaite said at the meeting.

Juul in 2024 aims to raise another $330 million as it fights to keep its existing products on the U.S. market and submits new vaping products for federal authorization. It is still offering shares at $1.07 to Juul’s shareholders and potential new investors.

Write to Jennifer Maloney at Jennifer.Maloney@wsj.com