The testimony of Matt Huang, co-founder and managing accomplice of crypto funding agency Paradigm, at Sam Bankman-Fried’s trial could assist the prosecution persuade jurors that the previous crypto mogul defrauded traders.
Huang testified Thursday that he and his agency have been at the hours of darkness a couple of vary of enterprise practices at FTX, pink flags that will have affected his determination to spend money on the corporate. Particularly, FTX’s use of buyer funds to prop up Bankman-Fried‘s hedge fund Alameda Analysis.
Authorities cooperation apart, Huang doubtless 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 quickly stayed in June) that accuses it, alongside Sequoia Capital and Thoma Bravo, of selling FTX to the detriment of its customers.
In response to Huang’s testimony, Paradigm was duped, as nicely.
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 now have marked it to zero.”
That establishes injury has been accomplished within the type of monetary losses, one of many issues the prosecution should set up with a view to show fraud.
The federal government will even have to determine misrepresentation, exhibiting that the defendant made false statements or hid materials info with a view to persuade traders to fork over cash. Prosecutors additionally must show that the traders relied on Bankman-Fried’s misrepresentations. Lastly, they’ll must exhibit that Bankman-Fried meant to defraud traders, which might be tougher.
Huang’s testimony Thursday no less than helps the institution of three out of 4 of these parts.
Paradigm started contemplating funding into FTX in 2019, in accordance with Huang. Throughout that point, Huang testified that he was instructed FTX trade wallets served as a custodian for buyer deposits and would all the time be out there if prospects wished to withdraw. He wasn’t instructed 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, “Probably not.”
“If it turned recognized that they have been doing that, I feel the trade would lose credibility within the model and other people wouldn’t need to use it, so it might 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 type of sacred,” he mentioned.
As Paradigm was contemplating funding into FTX, Huang mentioned he raised issues 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 popularity.
Bankman-Fried instructed 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 property if sure danger parameters are exceeded.
Huang mentioned FTX’s liquidation engine was an enormous a part of why Paradigm was interested in the corporate. He additionally agreed that Alameda’s exemption is inconsistent with Bankman-Fried’s assertion that it didn’t get preferential remedy.
“It could have meant that Alameda may commerce with leverage on the platform and, if these trades didn’t work out, may finally incur a adverse stability that must be paid for in some way,” mentioned Huang. “In a typical case, that may come from the cash we have been investing into the corporate that will go to fund operations. However in any case, it might go away the enterprise vulnerable to changing into bancrupt.”
Rehn additionally sought to determine 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 web revenue for Q1 2021 of $85 million. Rehn asserted that FTX had moved sure bills off these monetary statements with a view to artificially inflate the reported web income.
All through his testimony, Huang repeated that he had additionally expressed issues 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 finally cease Paradigm from investing in FTX, Huang testified that “SBF was very proof against having traders on the board.”
