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 in the dead of night a few vary of enterprise practices at FTX, crimson flags that might have affected his choice to spend money on the corporate. Specifically, FTX’s use of buyer funds to prop up Bankman-Fried‘s hedge fund Alameda Analysis.
Authorities cooperation apart, Huang probably has his personal motives for testifying in opposition to Bankman-Fried and distancing his agency from FTX. Paradigm is a part of a class-action 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.
In accordance with 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’ve marked it to zero.”
That establishes harm has been completed within the type of monetary losses, one of many issues the prosecution should set up in an effort to show fraud.
The federal government will even have to ascertain misrepresentation, exhibiting that the defendant made false statements or hid materials data in an effort to persuade buyers to fork over cash. Prosecutors additionally have to show that the buyers relied on Bankman-Fried’s misrepresentations. Lastly, they’ll have to reveal that Bankman-Fried supposed to defraud buyers, which might be tougher.
Huang’s testimony Thursday at the least helps the institution of three out of 4 of these components.
Paradigm started contemplating funding into FTX in 2019, in keeping with Huang. Throughout that point, Huang testified that he was informed FTX trade wallets served as a custodian for buyer deposits and would at all times be obtainable 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 realizing that, Huang responded, “Possible not.”
“If it grew to become recognized that they have been doing that, I feel the trade would lose credibility within the model and other people wouldn’t wish to use it, so it could be existential to the enterprise,” 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 in a position to entry these deposits, and wouldn’t have invested in FTX if he had.
“Buyer deposits are form of sacred,” he mentioned.
As Paradigm was contemplating funding into FTX, Huang mentioned he raised considerations concerning the hyperlink between Alameda and FTX. Primarily, he was apprehensive that Alameda — one of many largest merchants on the platform — would get preferential remedy, which might even be damaging to FTX’s status.
Bankman-Fried informed Huang Alameda didn’t have preferential remedy on the platform. However the prosecution identified that Alameda was exempt from FTX’s liquidation engine, a danger administration technique that’s designed to robotically 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 drawn 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 might have meant that Alameda may commerce with leverage on the platform and, if these trades didn’t work out, may in the end incur a unfavourable stability that must be paid for one way or the other,” mentioned Huang. “In a typical case, which may come from the cash we have been investing into the corporate that might go to fund operations. However in any case, it could go away the enterprise susceptible to changing into bancrupt.”
Rehn additionally sought to ascertain that Bankman-Fried made false statements to lull Paradigm into investing. He pulled up an excel spreadsheet that had been hooked up 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 internet revenue for Q1 2021 of $85 million. Rehn asserted that FTX had moved sure bills off these monetary statements in an effort to artificially inflate the reported internet earnings.
All through 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 result in unintended worth leakage. Whereas this didn’t in the end cease Paradigm from investing in FTX, Huang testified that “SBF was very proof against having buyers on the board.”