‘Marked to zero’: Paradigm testimony at SBF trial factors to investor fraud

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 buyers.

Huang testified Thursday that he and his agency have been at midnight a few vary of enterprise practices at FTX, crimson flags that may have affected his resolution 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 briefly 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 properly.

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 harm has been completed within the type of monetary losses, one of many issues the prosecution should set up with a purpose to show fraud.

The federal government may even have to ascertain misrepresentation, displaying that the defendant made false statements or hid materials data with a purpose 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 display that Bankman-Fried supposed to defraud buyers, which might be tougher.

Huang’s testimony Thursday a minimum of helps the institution of three out of 4 of these components.

Paradigm started contemplating funding into FTX in 2019, in line with Huang. Throughout that point, Huang testified that he was advised FTX alternate wallets served as a custodian for buyer deposits and would all the time be obtainable if prospects wished to withdraw. He wasn’t advised that FTX might 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, “doubtless not.”

“If it turned recognized that they have been doing that, I feel the alternate would lose credibility within the model and other people wouldn’t need 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 capable of 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 issues in regards to the hyperlink between Alameda and FTX. Primarily, he was fearful that Alameda — one of many largest merchants on the platform — would get preferential therapy, which might even be damaging to FTX’s popularity.

Bankman-Fried advised Huang Alameda didn’t have preferential therapy 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 a giant 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 therapy.

“It will have meant that Alameda might commerce with leverage on the platform and, if these trades didn’t work out, might finally incur a unfavorable stability that must be paid for someway,” mentioned Huang. “In a typical case, that may come from the cash we have been investing into the corporate that may go to fund operations. However in any case, it could depart 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 connected to an e mail Bankman-Fried despatched to Huang displaying 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 purpose to artificially inflate the reported web earnings.

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 might 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 buyers on the board.”