In a courtroom drama that sounds like it was ripped from the pages of a thriller novel, Matthew Huang, the co-founder of crypto investment firm Paradigm, took the stand during Sam Bankman-Fried’s trial. Huang’s testimony painted a picture of a crypto mogul who was less than enthusiastic about sharing power with outside investors.
Boardroom Rejection: SBF’s Reluctance
Huang recounted that Bankman-Fried, or SBF as he’s colloquially known, was “very resistant” to the idea of having investors on FTX’s board. According to Huang, SBF felt that such additions wouldn’t provide meaningful insight or value. This belief was likely the reason for the exceedingly thin board structure FTX had, consisting of just three individuals: SBF, a lawyer from Antigua and Barbuda, and Jonathan Cheesman, a former executive who wisely exited the board in June.
Investment Decisions: The $125 Million Miscalculation
Paradigm’s engagement with FTX came during a thrilling growth period. Huang revealed that he facilitated discussions before Paradigm made a significant $125 million investment in FTX’s impressive $900 million Series B funding round back in July 2021. He candidly admitted a lapse in due diligence, highlighting his over-reliance on the information doled out by the ever-charismatic SBF.
Red Flags and Rapid Growth
As if balancing on the edge of a tightrope, Huang sensed the precariousness of FTX’s structure. While alarm bells rang in his head about the merger of FTX with its sibling hedge fund, Alameda Research, the lure of FTX’s soaring market share was enough to entice investors, including some heavyweights from the venture capital world.
Trade Secrets or Preferential Treatment?
Amongst the weeds of Huang’s testimony were distressing hints of favoritism. He shared anxieties that Alameda might have been privy to special treatment courtesy of FTX. Huang expressed his fears about the ramifications this could have on the integrity of FTX if rumors turned out to be true. Yet, SBF assured Huang that Alameda was not on any special list, which left Huang in the fog—until he learned from FTX co-founder Gary Wang that Alameda indeed had a veritable goldmine of access to capital.
Customer Trust: The Holy Grail of Investments
As the prosecution grilled Huang, they posed a scenario: would his investment decision have shifted had he known that FTX was allegedly using customer deposits for investments? Huang’s stark response was a firm “Yes.” He reiterated the notion that customer deposits should be treated with the utmost reverence, a principle obviously ignored in the chaotic underbelly of FTX operations.
Lessons from the Fallout
This courtroom ordeal serves as a reminder of the importance of transparency in the financial world. Investors are advised to do their homework, dig deeper, and never take the words of a charismatic CEO at face value. Huang’s experience reflects a common adage in finance: if it sounds too good to be true, it probably is.
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