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

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 had been at the hours of darkness a couple of vary of enterprise practices at FTX, purple flags that may have affected his choice 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 possible has his personal motives for testifying towards 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.

Based on 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, “Now we 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 purpose to show fraud.

The federal government may even have to ascertain misrepresentation, exhibiting 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 exhibit that Bankman-Fried meant to defraud buyers, which could possibly 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 accordance with Huang. Throughout that point, Huang testified that he was instructed FTX trade wallets served as a custodian for buyer deposits and would at all times be accessible if clients wished to withdraw. He wasn’t instructed 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 understanding that, Huang responded, “Possible not.”

“If it turned identified that they had been doing that, I feel the trade would lose credibility within the model and folks wouldn’t wish to use it, so it will be existential to the enterprise,” stated 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 stated.

As Paradigm was contemplating funding into FTX, Huang stated he raised issues concerning the hyperlink between Alameda and FTX. Primarily, he was frightened that Alameda — one of many largest merchants on the platform — would get preferential therapy, which might even be damaging to FTX’s repute.

Bankman-Fried instructed Huang Alameda didn’t have preferential therapy on the platform. However the prosecution identified that Alameda was exempt from FTX’s liquidation engine, a threat administration technique that’s designed to robotically set off the sale of property if sure threat parameters are exceeded.

Huang stated 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 therapy.

“It might have meant that Alameda might commerce with leverage on the platform and, if these trades didn’t work out, might finally incur a detrimental steadiness that must be paid for by some means,” stated Huang. “In a typical case, which may come from the cash we had been investing into the corporate that may go to fund operations. However in any case, it will depart the enterprise liable to turning 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 electronic mail Bankman-Fried despatched to Huang exhibiting FTX’s monetary stats as of April 2021. The steadiness 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 with a purpose to artificially inflate the reported internet 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 stated 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.”