May 29, 2024
Sam Bankman-Fried's resistance to investor involvement
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Venture Capital Firms Face Fallout from FTX Investment as Trial Unfolds

Sam Bankman-Fried resisted the idea of investors joining FTX’s board of directors, according to Matthew Huang, co-founder and managing partner of crypto investment firm Paradigm. Paradigm and several venture capital firms, including Sequoia, Temasek, and BlackRock, faced repercussions from their investments in the now-bankrupt crypto exchange, leading to scrutiny and subsequent statements regarding their involvement with FTX.

During his testimony on the third day of Bankman-Fried’s trial in a New York Federal Court, Huang stated that Bankman-Fried believed that having investors on FTX’s board of directors wouldn’t contribute significantly.

FTX’s board consisted of three individuals: Bankman-Fried, an unnamed lawyer from Antigua and Barbuda (where FTX was incorporated), and Jonathan Cheesman, a former FTX executive who stepped down from the board in June.

Huang had several discussions with Bankman-Fried before Paradigm’s $125 million investment in FTX’s Series B funding round of $900 million, which closed in July 2021. Huang acknowledged that he hadn’t conducted sufficient due diligence and relied heavily on information provided by Bankman-Fried. Despite concerns about FTX’s lack of formal structure and its connection to its sister hedge fund, Alameda Research, Huang, and other Paradigm investors were attracted by FTX’s rapid market share expansion in the crypto industry.

However, Huang expressed concerns that Bankman-Fried might have been prioritizing work on Alameda over FTX, potentially impacting Paradigm’s investment. Furthermore, there were worries that Alameda might have been receiving preferential treatment from FTX, which could damage the company’s reputation if proven true. Bankman-Fried had assured Huang that Alameda wasn’t receiving any special treatment from FTX. On the same day, FTX co-founder Gary Wang testified that Alameda had access to a nearly unlimited flow of capital from the exchange.

Huang also claimed he had no knowledge of the alleged fund commingling between FTX and Alameda Research. When asked by the prosecution if his investment decision would have changed if he had known that FTX allegedly used customer deposits for investments, Huang replied, “Yes,” emphasizing that customer deposits were generally considered sacrosanct.

Image by pixabay

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