The testimony of Matt Huang, co-founder and managing associate of crypto funding agency Paradigm, at Sam Bankman-Fried’s trial might assist the prosecution persuade jurors that the previous crypto mogul defrauded buyers.
Huang testified Thursday that he and his agency have been at nighttime a couple of vary of enterprise practices at FTX, crimson flags that might have affected his choice to put money into the corporate. Namely, FTX’s use of buyer funds to prop up Bankman-Fried‘s hedge fund Alameda Research.
Government cooperation apart, Huang seemingly has his personal motives for testifying in opposition to Bankman-Fried and distancing his agency from FTX. Paradigm is a part of a category motion lawsuit (which was briefly stayed in June) that accuses it, alongside Sequoia Capital and Thoma Bravo, of selling FTX to the detriment of its customers.
According to Huang’s testimony, Paradigm was duped, as effectively.
Over two funding rounds between 2021 and 2022, Paradigm invested $278 million into FTX. When prosecutor Thane Rehn requested what Paradigm estimates the present worth of that funding to be, Huang replied, “We have marked it to zero.”
That establishes injury has been achieved within the type of monetary losses, one of many issues the prosecution may have to set up so as to show fraud.
The authorities may also have to set up misrepresentation, exhibiting that the defendant made false statements or hid materials info so as to persuade buyers to fork over cash. Prosecutors additionally want to show that the buyers relied on Bankman-Fried’s misrepresentations. Finally, they’ll want to reveal that Bankman-Fried supposed to defraud buyers, which may very well be tougher.
Huang’s testimony Thursday at least helps the institution of three out of 4 of these components.
Paradigm started contemplating funding into FTX in 2019, in accordance to Huang. During that point, Huang testified that he was informed FTX alternate wallets served as a custodian for buyer deposits and would all the time be out there if clients wished to withdraw. He wasn’t informed that FTX may take these deposits out and use them for their very own enterprise functions.
When requested if he would have nonetheless invested in FTX understanding that, Huang responded, “Likely not.”
“If it became known that they were doing that, I think the exchange would lose credibility in the brand and people wouldn’t want to use it, so it would be existential to the business,” mentioned Huang.
Not solely was Huang uninformed about FTX’s behavior of utilizing buyer deposits for its personal functions, however he additionally testified that he didn’t know Alameda was ready to entry these deposits, and wouldn’t have invested in FTX if he had.
“Customer deposits are sort of sacred,” he mentioned.
As Paradigm was contemplating funding into FTX, Huang mentioned he raised considerations in regards to the hyperlink between Alameda and FTX. Mainly, he was frightened that Alameda — one of many largest merchants on the platform — would get preferential remedy, which might even be damaging to FTX’s repute.
Bankman-Fried informed Huang Alameda didn’t have preferential remedy on the platform. But the prosecution identified that Alameda was exempt from FTX’s liquidation engine, a danger administration technique that’s designed to routinely set off the sale of belongings if sure danger parameters are exceeded.
Huang mentioned FTX’s liquidation engine was a giant a part of why Paradigm was attracted to the corporate. He additionally agreed that Alameda’s exemption is inconsistent with Bankman-Fried’s assertion that it didn’t get preferential remedy.
“It would have meant that Alameda could trade with leverage on the platform and, if those trades didn’t work out, could ultimately incur a negative balance that would have to be paid for somehow,” mentioned Huang. “In a typical case, that might come from the money we were investing into the company that would go to fund operations. But in any case, it would leave the business at risk of becoming insolvent.”
Rehn additionally sought to set up that Bankman-Fried made false statements to lull Paradigm into investing. He pulled up an Excel spreadsheet that had been connected to an e-mail Bankman-Fried despatched to Huang exhibiting FTX’s monetary stats as of April 2021. The stability sheet confirmed FTX’s annualized approximate income, estimating a web revenue for Q1 2021 of $85 million. Rehn asserted that FTX had moved sure bills off these monetary statements so as to artificially inflate the reported web income.
Throughout his testimony, Huang repeated that he had additionally expressed considerations with Bankman-Fried over FTX’s lack of a board and lack of governance, which he mentioned may lead to unintended worth leakage. While this didn’t finally cease Paradigm from investing in FTX, Huang testified that “SBF was very resistant to having investors on the board.”