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Matt Huang, a co-founder and managing partner at Paradigm, a crypto investment firm, provided crucial testimony during Sam Bankman-Fried's trial, potentially aiding the prosecution in their efforts to prove that the former crypto tycoon defrauded investors. Huang revealed that he and his firm were unaware of several questionable business practices at FTX, which would have affected their decision to invest in the company. Specifically, FTX had used customer funds to support Bankman-Fried's hedge fund Alameda Research.
Apart from government cooperation, Huang has personal motives for testifying against Bankman-Fried and distancing Paradigm from FTX. Paradigm is involved in a class-action lawsuit that accuses the firm, along with Sequoia Capital and Thoma Bravo, of promoting FTX to the detriment of its users. Huang's testimony suggests that Paradigm itself was deceived.
To establish fraud, the prosecution needs to prove financial losses, misrepresentation, investor reliance on false statements, and Bankman-Fried's intent to defraud. Huang's testimony strengthens three out of four of these aspects. Huang disclosed that when considering an investment in FTX in 2019, he was informed that FTX exchange wallets served as custodians for customer deposits and would always be available for withdrawal. However, Huang was not informed that FTX could use those deposits for its own purposes. Additionally, he was unaware that Alameda had access to those deposits and expressed concerns about preferential treatment for the hedge fund on FTX's platform.
Bankman-Fried assured Huang that Alameda did not receive preferential treatment. However, the prosecution pointed out that Alameda was exempt from FTX's liquidation engine, contradicting Bankman-Fried's statement. Huang emphasized that FTX's liquidation engine was an attractive feature for Paradigm and that Alameda's exemption was inconsistent.
Furthermore, the prosecution presented evidence suggesting that Bankman-Fried manipulated financial statements to inflate reported net profits. Huang also expressed concerns over FTX's lack of governance and a board, potentially leading to value leakage.
Overall, Huang's testimony strengthens the case against Bankman-Fried by revealing crucial information about FTX's practices and indicating potential misrepresentations made by the defendant.