2.Kungyu Matthew Huang — Direct/Cross
496 linesDIRECT EXAMINATION BY MR. REHN:
KUNGYU MATTHEW HUANG: Paradigm.
KUNGYU MATTHEW HUANG: Investment firm focused on cryptocurrency.
KUNGYU MATTHEW HUANG: Venture capital investment firm.
KUNGYU MATTHEW HUANG: It's an investment firm that makes investments in early-stage companies that have the potential to grow over time.
KUNGYU MATTHEW HUANG: Sure.
KUNGYU MATTHEW HUANG: Generally, yes.
MR. REHN: And when you're investing in those companies, where does the money in your fund come from?
KUNGYU MATTHEW HUANG: We ourselves have investors called limited partners.
KUNGYU MATTHEW HUANG: University endowments, nonprofit foundations and the like.
MR. REHN: So organizations like that give money to Paradigm and then Paradigm invests in startups on their behalf?
KUNGYU MATTHEW HUANG: That's right.
KUNGYU MATTHEW HUANG: I'm one of the co-founders and managing partners.
KUNGYU MATTHEW HUANG: 2018.
KUNGYU MATTHEW HUANG: 2018, yeah.
MR. REHN: Sorry. If you could just try to speak up into the microphone.
And does Paradigm have any particular investment focus?
KUNGYU MATTHEW HUANG: We focus on digital assets and cryptocurrencies as well as the companies in the ecosystem.
MR. REHN: So in your capacities as a managing partner and co-founder of Paradigm, have you gained some knowledge and experience of digital assets in the companies in the cryptocurrency ecosystem?
KUNGYU MATTHEW HUANG: I believe so, yes.
KUNGYU MATTHEW HUANG: It does.
KUNGYU MATTHEW HUANG: We have.
KUNGYU MATTHEW HUANG: Around 2019.
KUNGYU MATTHEW HUANG: Yes, in early 2021.
MR. REHN: And did you speak to anyone in particular at FTX regarding the possibility of investing in the company?
KUNGYU MATTHEW HUANG: We did.
KUNGYU MATTHEW HUANG: Two people. One was the founder and CEO, Sam Bankman-Fried; and another was an employee at the company named Ramnik Arora.
KUNGYU MATTHEW HUANG: Right.
KUNGYU MATTHEW HUANG: My understanding at the time was that he worked on product and then was also involved in fundraising.
MR. REHN: How did you speak with Sam Bankman-Fried when you were considering investing in the company?
KUNGYU MATTHEW HUANG: Via Zoom.
KUNGYU MATTHEW HUANG: Don't recall specifically, but about a handful.
KUNGYU MATTHEW HUANG: Subsequent to the investment we have met in person a handful of times.
KUNGYU MATTHEW HUANG: Initially he was taking a trip out to this——the SF Bay area where we're based, and we had a couple of dinners, and then subsequent to that, a couple other times as well.
KUNGYU MATTHEW HUANG: I do.
KUNGYU MATTHEW HUANG: He's sitting back there——he's sitting back there. I can't really see an article of clothing.
JUDGE KAPLAN: All right, Mr. Huang. It's stipulated that the witness has identified the defendant.
MR. REHN: So in early 2021, is that the time period when the defendant spoke with you about the possibility of investing in FTX?
KUNGYU MATTHEW HUANG: Yes, that's right.
KUNGYU MATTHEW HUANG: We were considering participating in what they called the Series B, which was a equity financing. They were raising funds to help operate the business.
KUNGYU MATTHEW HUANG: It's an investment where investors are buying shares in a company that they hope will become more valuable as the company succeeds.
KUNGYU MATTHEW HUANG: We hope that the business will succeed and therefore the shares that we own will become more valuable.
MR. REHN: What are some of the factors you look at when evaluating whether to invest in a particular business?
KUNGYU MATTHEW HUANG: It can depend on the company. There are a lot of factors. We start often with a sense of the team and, you know, what we think of them and how impressive they are; we'll think about the market and maybe competitors; we'll look at financial information, like revenue and costs; and we'll think about risks as well.
KUNGYU MATTHEW HUANG: Usually through talking to the team directly.
KUNGYU MATTHEW HUANG: That's right.
KUNGYU MATTHEW HUANG: We do.
MR. REHN: So going back to the Zoom calls you mentioned earlier that you had with the defendant before you invested, do you recall what topics were discussed on those calls?
KUNGYU MATTHEW HUANG: Some of them, yes.
KUNGYU MATTHEW HUANG: One of the things that drew us to the company was how fast they appeared to be growing and, you know, not just in revenues or trading volumes but in particular market share, so it would——it was sort of unusual to see a new crypto exchange grow market shares so quickly. We were also focused on some of the risks we were thinking about around governance and the lack of a formal board, as well as risks from the entanglement between FTX and Alameda.
KUNGYU MATTHEW HUANG: They did.
MR. REHN: Mr. Bianco, could you please show the witness what's been marked for identification as Government Exhibit 532.
KUNGYU MATTHEW HUANG: I do.
KUNGYU MATTHEW HUANG: It appears to be a PowerPoint presentation from the company, FTX.
MR. LISNER: No objection.
JUDGE KAPLAN: Received.
(Government's Exhibit 532 received in evidence)
BY MR. REHN:
MR. REHN: Mr. Huang, did you review this presentation in connection with deciding whether to invest in FTX?
KUNGYU MATTHEW HUANG: We did.
KUNGYU MATTHEW HUANG: That's what we recall, yes.
MR. REHN: Mr. Huang, do you see this? This page lists the people who are identified as "Our Team" from FTX?
KUNGYU MATTHEW HUANG: I do.
MR. REHN: And who were the members of the FTX team that you in particular spoke with prior to investing?
KUNGYU MATTHEW HUANG: We spoke with Sam on the top left and Ramnik, as well as one Zoom call with Dan Friedberg, the general counsel.
(Continued on next page)
MR. REHN: If we could go back to page 2 of this exhibit.
Mr. Bianco, if you could highlight the line: FTX is the leading digital assets exchange. Then at the bottom on that same side can you highlight: The fastest growing crypto exchange.
MR. REHN: Mr. Huang, what was the type of business that you understood you were going to be investing in when you were looking at FTX?
KUNGYU MATTHEW HUANG: We understood FTX to be an exchange that facilitated the trading of cryptocurrencies and crypto assets and that it was growing really fast.
KUNGYU MATTHEW HUANG: It's a platform that generally centralized exchanges like FTX would take customer deposits that people would deposit while they are trading on the platform, and the business would take a fee on those trades.
KUNGYU MATTHEW HUANG: Yes, I do.
MR. REHN: Mr. Bianco, if I could ask you to expand the fourth numbered points and all of the subpoints underneath that.
KUNGYU MATTHEW HUANG: I do.
MR. REHN: And under that, one of the things it says is that FTX serves as a custodian.
Do you see that?
MR. REHN: When you were considering your investment in FTX, were you told that the FTX exchange wallets served as the custodian for customer deposits?
KUNGYU MATTHEW HUANG: That was our understanding, yes.
MR. REHN: And based on your experience as an investor in financial technology companies, what does it mean for a crypto exchange to maintain exchange wallets that serve as a custodian?
KUNGYU MATTHEW HUANG: Our general understanding was that the platform would take in deposits and hold onto them while their customers could trade on the platform. If those customers wanted those funds back, that they could withdraw them.
MR. REHN: Is handling customer deposits, holding them in custody, and then processing withdrawals part of the ordinary business of a crypto exchange?
KUNGYU MATTHEW HUANG: Generally, yes, for centralized exchanges.
MR. REHN: When you were considering your investment in FTX, were you ever told that the exchange could take those customer deposits and use them for its own business purposes?
KUNGYU MATTHEW HUANG: We were not.
MR. REHN: If you had been told that, would that be inconsistent with the description of its role here as a custodian?
KUNGYU MATTHEW HUANG: Yes. In the context of the exchange wallets, yes.
MR. REHN: Would that have been something you would have taken into account in deciding whether to invest in the company?
KUNGYU MATTHEW HUANG: Yes, we would have.
MR. REHN: If you had been told that FTX could take customer funds out of the exchange wallets for its own business purposes, would you have still invested in the exchange?
KUNGYU MATTHEW HUANG: We would have wanted to learn more, but likely not.
KUNGYU MATTHEW HUANG: I think it would have been the general expectation by customers in the crypto industry that an exchange like FTX would be holding onto customer deposits and not spending them or doing other things with them. If it became known that they were doing that, I think the exchange would lose credibility in brand and people wouldn't want to use it, so it would be existential to the business.
MR. LISNER: Objection, your Honor. Move to strike for general expectation in the industry versus Mr. Huang's personal knowledge.
MR. REHN: Your Honor, he testified based on his experience investing in other crypto companies and his knowledge in the markets.
JUDGE KAPLAN: The question was why not. It's perfectly responsive to the question and it was an appropriate question to which no objection was made.
MR. LISNER: Thank you, your Honor.
MR. REHN: Mr. Bianco, we can take that exhibit down.
If I could ask you to show the witness what's been marked for identification purposes as Government Exhibit 320.
KUNGYU MATTHEW HUANG: I do.
KUNGYU MATTHEW HUANG: It's an email from SBF to a few team members at paradigm, including myself.
KUNGYU MATTHEW HUANG: April 25, 2021.
MR. LISNER: No objection.
JUDGE KAPLAN: Received.
(Government Exhibit 320 received in evidence)
MR. REHN: Mr. Bianco, if I could ask you to expand the top part of this, just showing who the top email is from and who it's to.
MR. REHN: Mr. Huang, was this email sent from the defendant to you and a couple of other people at Paradigm?
KUNGYU MATTHEW HUANG: It was.
KUNGYU MATTHEW HUANG: He's a member of the Paradigm investment team.
KUNGYU MATTHEW HUANG: He was.
MR. REHN: If we could take down the expanded portion of this email.
If we could look at the email that begins at the bottom of page 1, Mr. Bianco.
KUNGYU MATTHEW HUANG: It appears he did, yes.
MR. REHN: Could we go to the next page of this exhibit, Mr. Bianco. If you could expand the portion of this email under the bullet point governance.
MR. REHN: Mr. Huang, in connection with your evaluation of your FTX investment, did Paradigm communicate certain concerns to the defendant?
KUNGYU MATTHEW HUANG: Yes, we did.
MR. REHN: If we look at the first concern being communicated, could you read the first two sentences after the word governance.
KUNGYU MATTHEW HUANG: The first two sentences read: As we understand, FTX is effectively owned and controlled by Sam, lacking more traditional corporate governance model, rights, etc. One example of where this can negatively manifest with crypto companies is through (unintended) value leakage; for example, via FTT, Alameda, or some other mechanism.
KUNGYU MATTHEW HUANG: We had an understanding that it was a trading firm also founded by SBF.
KUNGYU MATTHEW HUANG: At the time it was generally known in the crypto industry, so we had heard about it before and had learned a little bit about it from talking to SBF directly as well.
KUNGYU MATTHEW HUANG: What I recall is, we were focused on a couple issues.
One, we were thinking about making investment in FTX the company, not in any of these other assets, like Alameda, so we were worried about how much time would Sam spend on the business, and we didn't want to make the investment and then have him spend more of his time on Alameda at our expense and the business' expense.
And the second concern we were worried about was to what extent did Alameda have any preferential treatment on the exchange, because we knew that if that were the case, that would be damaging to the reputation and customers wouldn't want to use the exchange. Given we were investing in the exchange, we wanted to make sure that that wasn't happening so that the investment would hopefully go well.
MR. REHN: Why would it be damaging to the business' reputation if Alameda had preferential treatment on the exchange?
KUNGYU MATTHEW HUANG: I think there are a lot of ways that that could manifest. We were worried about things like front running or maybe access to the order book or various other ways that Alameda could have favorable treatment, and, therefore, be at an advantage to the other customers that were trading there. If customers found that out, they would want to trade elsewhere.
MR. REHN: After Paradigm sent this email to the defendant, did you discuss these concerns with the defendant?
JUDGE KAPLAN: Before we get to discussions, could we elicit what he was talking about. Front running, for example, access to an order book.
KUNGYU MATTHEW HUANG: We were worried that if Alameda had the ability to trade faster than customers that they would be able to insert their trades ahead of other customers and wield an advantage.
On the topic of visibility into the order book, that would show them what their customers -- where their customers were positioned. And especially if there was margin on the exchange and there were thresholds that would liquidate customers, that would give Alameda an advantage to kind of going after those customers.
But those are just two examples. We were generally concerned about any type of preferential treatment.
MR. REHN: After you sent this email, did you have a call with the defendant where you discussed the concern about preferential treatment?
KUNGYU MATTHEW HUANG: We did.
MR. REHN: Do you recall what the defendant said in response to your concern about preferential treatment for Alameda?
KUNGYU MATTHEW HUANG: I recall that we were told that there was no preferential treatment for Alameda, that Alameda was one of the larger traders on the platform, but that was decreasing over time. We were shown some data about that.
MR. REHN: In considering your investment in FTX, did you learn anything about the exchange's risk management?
KUNGYU MATTHEW HUANG: We did.
KUNGYU MATTHEW HUANG: We did.
MR. REHN: From your perspective as an investor, was the liquidation engine a factor that informed your decision to invest?
KUNGYU MATTHEW HUANG: It was.
KUNGYU MATTHEW HUANG: So customers on FTX could take leverage positions, which means they put up $100 but maybe they actually buy $500 worth of cryptocurrency. And what the liquidation engine does is, it makes sure that if prices of that cryptocurrency moves against the customer that they close the position in time so that the customer has enough money to cover whatever their losses are.
So it's very important that the liquidation engine functions properly to make sure that the exchange isn't losing money to customers. So part of the pitch for FTX was actually that not only was the liquidation engine well functioning, but it was sort of industry best in class, and that actually enabled them to offer better forms of leverage to their customers. So it was part of why we were attracted to the business. We felt that the liquidation engine was impressive and, as we learned more about it, it seemed like a great selling point.
KUNGYU MATTHEW HUANG: We were not.
MR. REHN: Would that be inconsistent with the statement that it does not get preferential treatment?
KUNGYU MATTHEW HUANG: Yes, it would be inconsistent.
MR. REHN: If you had been told that Alameda was exempt from the liquidation engine, would that have been a concern for you in determining whether to invest in FTX?
KUNGYU MATTHEW HUANG: It would have been a concern.
KUNGYU MATTHEW HUANG: It would have meant that Alameda could trade with leverage on the platform and, if those trades didn't work out, could ultimately incur a negative balance that would have to be paid for somehow. In a typical case that might come from the money we were investing into the company. That would go to fund operations. But in any case, it would leave the business at risk of becoming insolvent.
KUNGYU MATTHEW HUANG: No, we were not.
MR. REHN: Would that be inconsistent with this statement that it does not get preferential treatment?
MR. LISNER: Objection, your Honor. The statements speak for themselves.
JUDGE KAPLAN: Sustained.
MR. REHN: If you had been told that Alameda could have a negative balance, would that have been something you would have taken into account in deciding whether to invest?
KUNGYU MATTHEW HUANG: Yes, we would have.
KUNGYU MATTHEW HUANG: If we had known Alameda could have a negative balance on the exchange, it would be both a risk to the business that we were investing in, but there would be a strong possibility, if crypto prices were volatile, that the business could be insolvent and our investment would do poorly. It would also be damaging to the brand and customer trust if that ever got out, because, as a customer, I don't think I would want to trade on an exchange where that was possible either.
MR. REHN: Were you ever told that Alameda had the ability to access and use the customer deposits from other FTX customers?
KUNGYU MATTHEW HUANG: We were not.
MR. LISNER: Objection. Foundation.
JUDGE KAPLAN: Overruled.
MR. REHN: If you had been told that Alameda had the ability to access and use the deposits of other customers, would you have taken that into consideration in deciding whether to invest?
KUNGYU MATTHEW HUANG: We would have wanted to know more, yes.
KUNGYU MATTHEW HUANG: Based on a lot of our general market understanding, but also other investments in centralized crypto exchanges, it was generally understood that customer deposits are sort of sacred, that when customers deposit into the exchange, they expect the ability to get them back out. So to the extent that wasn't true, we would want to know more. And without knowing more, it would be a problem for an investment.
MR. REHN: Mr. Bianco, could you pull back up this exhibit. If we could go to the top email again.
KUNGYU MATTHEW HUANG: It is.
KUNGYU MATTHEW HUANG: It appears to be.
MR. LISNER: Objection, your Honor.
JUDGE KAPLAN: First of all, this is Government Exhibit 320. What's the objection?
MR. LISNER: Document speaks for itself. He has no personal knowledge of when it was sent.
JUDGE KAPLAN: Overruled.
KUNGYU MATTHEW HUANG: There appears to be, yes.
KUNGYU MATTHEW HUANG: FTX stats, 2021, April 23.
KUNGYU MATTHEW HUANG: It appears to be, yes.
KUNGYU MATTHEW HUANG: It appears to be, yes.
KUNGYU MATTHEW HUANG: I do.
KUNGYU MATTHEW HUANG: It appears to be some business and financial metrics about FTX.
KUNGYU MATTHEW HUANG: It appears to be, yes.
JUDGE KAPLAN: Received.
(Government Exhibit 320A received in evidence)
MR. LISNER: No objection.
MR. REHN: Mr. Huang, looking at the spreadsheet that the defendant sent you, does this have information about FTX's revenue and expenses?
KUNGYU MATTHEW HUANG: It appears to, yes.
KUNGYU MATTHEW HUANG: It appears to, yes.
MR. REHN: On row 7.
Before we look at these numbers, can you explain what annualized approx revenue means here?
MR. LISNER: Objection, your Honor.
JUDGE KAPLAN: Ground.
MR. LISNER: He could testify to his understanding.
JUDGE KAPLAN: Rephrase.
MR. REHN: Mr. Huang, based on your perspective as an investor, what was your understanding of what annualized approx revenue represents?
KUNGYU MATTHEW HUANG: My understanding of what that means would be to take the revenue that the company generated in the first quarter of 2021 and multiply it by four to estimate, if the revenues stayed the same, how much would they make for the rest of the year.
KUNGYU MATTHEW HUANG: 596 million.
MR. REHN: So if that's an annualized number, what do you understand that to mean, the actual revenue for quarter 1 2021 was that you were being told?
KUNGYU MATTHEW HUANG: I would understand that to mean about 149 million in Q1.
MR. REHN: Beneath that, do you see that there are some columns listing various expenses or some rows listing some various expenses?
KUNGYU MATTHEW HUANG: 63 million.
KUNGYU MATTHEW HUANG: About 15 million.
MR. REHN: So you multiply the four quarters to get the annualized number based on the first quarter?
KUNGYU MATTHEW HUANG: That's right.
MR. REHN: What was the estimated net profit on an annualized basis for quarter 1 that the defendant was reporting to you?
KUNGYU MATTHEW HUANG: 322 million.
KUNGYU MATTHEW HUANG: About 80 million.
KUNGYU MATTHEW HUANG: It appears to be revenue minus the three costs rows.
MR. REHN: If the estimated net profit for the quarter was 85 million, that's taking basically the revenue for that quarter and subtracting the expenses for that quarter, is that right?
KUNGYU MATTHEW HUANG: That's right.
MR. REHN: Now, if we look at these expenses, if the company had hundreds of millions of dollars in expenses in the first quarter of 2021 that were not included here, what would be the effect that that would have on the profits for the quarter?
MR. LISNER: Objection. Calls for speculation.
JUDGE KAPLAN: Overruled.
KUNGYU MATTHEW HUANG: If there were expenses excluded, then the profits would look artificially high.
MR. REHN: If the amount of expenses that was excluded was in the hundreds of millions, what effect would that have on the estimated net profit?
KUNGYU MATTHEW HUANG: It would mean that the profit was actually negative rather than positive.
MR. REHN: If the numbers that were reported to you had showed negative profits for the first quarter instead of positive profits, would that have been something you would have taken into account?
KUNGYU MATTHEW HUANG: It would have been.
MR. REHN: Would it have been something that would have affected your willingness to invest in the company?
KUNGYU MATTHEW HUANG: We would have at least wanted to know more and the nature of the costs. And certainly if there were costs being excluded from numbers we were being shown, we would want to understand why.
MR. REHN: More generally, if you had been told that the company was moving certain expenses off the financial statements it was sharing with you, would that have been something you would have wanted to know something more about?
KUNGYU MATTHEW HUANG: We expect the numbers being shown to us to be generally accurate. If they are missing certain expenses, we would at least want to ask if that is accidental or on purpose; and if it was on purpose, that would be a problem.
KUNGYU MATTHEW HUANG: We did.
KUNGYU MATTHEW HUANG: In mid 2021.
KUNGYU MATTHEW HUANG: About 125 million.
KUNGYU MATTHEW HUANG: We understood them to be raising funds to fund operations of the business.
MR. REHN: When you were speaking with the defendant before making the investment, were you ever told that FTX was taking the money it was raising from this fund raising and transferring the money to Alameda?
MR. LISNER: Objection.
JUDGE KAPLAN: Why?
MR. LISNER: Foundation.
JUDGE KAPLAN: Overruled.
KUNGYU MATTHEW HUANG: No, we were not.
MR. REHN: If you had been told that, would that have been something you would have taken into account in determining whether to invest?
KUNGYU MATTHEW HUANG: When we invest in a company, we expect them to do what they told us they were going to do with it, so we understood them to be raising money to fund operations of the business.
Even more than that, because we were concerned about the potential interlink between Alameda and FTX, we had focused a lot on their relationship, and we were assured that they would become less linked over time. So it would be very concerning for them to being sending money from FTX To Alameda.
MR. REHN: After that initial investment in July 2021, did Paradigm make any further investments in FTX?
KUNGYU MATTHEW HUANG: We did.
KUNGYU MATTHEW HUANG: We made a subsequent investment in the series C round the company raised as it closed the beginning of 2022.
KUNGYU MATTHEW HUANG: We did.
KUNGYU MATTHEW HUANG: So the next round that we did was about 150 million, so in total about 278 million or so.
KUNGYU MATTHEW HUANG: We have marked it to zero.
JUDGE KAPLAN: Thank you.
We will take our afternoon break. Fifteen minutes.
(Recess)
JUDGE KAPLAN: The witness is reminded he is still under oath.
Cross examination, Mr. Lisner.
CROSS-EXAMINATION BY MR. LISNER:
MR. LISNER: Good afternoon, Mr. Huang. I'm David Lisner, and we have not met before right now, correct?
KUNGYU MATTHEW HUANG: Correct.
MR. LISNER: You testified that you're one of Paradigm's cofounders?
MR. LISNER: You cofounded Paradigm with Mr. -- forgive the pronunciation -- Ehrsam?
KUNGYU MATTHEW HUANG: That's right.
MR. LISNER: Before you founded Paradigm with Mr. Ehrsam, you worked at Sequoia Capital?
KUNGYU MATTHEW HUANG: That's right.
MR. LISNER: Is Sequoia Capital a leading investment firm in the Silicon Valley?
JUDGE KAPLAN: Sustained.
Depends who you ask, I imagine.
MR. LISNER: You testified that Paradigm focuses on investing in the cryptocurrency sector?
KUNGYU MATTHEW HUANG: That's right.
MR. LISNER: That covers investing in both crypto assets themselves and also crypto companies?
KUNGYU MATTHEW HUANG: That's right.
MR. LISNER: And in this instance you were an investor in FTX, correct?
KUNGYU MATTHEW HUANG: That's right.
MR. LISNER: Paradigm was never a customer buying or selling crypto assets on the exchange?
KUNGYU MATTHEW HUANG: That's correct.
MR. LISNER: Is it your understanding that Paradigm never opened an account because FTX would not allow U.S. customers on the site?
JUDGE KAPLAN: Sustained.
MR. LISNER: Why did Paradigm not have an account on FTX?
KUNGYU MATTHEW HUANG: I can't speak directly to that because the people that make that decision are on our trading team, but my understanding is, we had plenty of venues or exchanges that we were already trading on.
MR. LISNER: And you understand that the crypto market is risky?
KUNGYU MATTHEW HUANG: I would say it's like any other market.
MR. LISNER: You don't consider the crypto sector to be different from other technology sectors?
JUDGE KAPLAN: Sustained.
MR. LISNER: Now, it's important when Paradigm picks the companies that it invests in that it picks good, promising companies so it can earn a return on its investments?
KUNGYU MATTHEW HUANG: That's right.
MR. LISNER: And to pick the right companies, does Paradigm perform research or something in the industry referred to as due diligence of potential investments?
KUNGYU MATTHEW HUANG: We do.
MR. LISNER: And, as part of that, you consider a lot of factors, some of which are important to your investment decision?
KUNGYU MATTHEW HUANG: Yes, that's right.
MR. LISNER: And there are also less important factors that have little or no importance to your investment decision?
KUNGYU MATTHEW HUANG: That's right.
MR. LISNER: As part of Paradigm's typical diligence or research process, do you consider internal documents from the company that you are looking to invest in?
KUNGYU MATTHEW HUANG: Sorry. Could you repeat that.
MR. LISNER: I'll rephrase it.
As part of your investment research, Paradigm considers internal documents from the potential company you're looking to make an investment in?
KUNGYU MATTHEW HUANG: We consider documents that are presented to us by the company.
MR. LISNER: And those typically include financial statements?
KUNGYU MATTHEW HUANG: Sometimes, yes.
MR. LISNER: Company balance sheets?
JUDGE KAPLAN: Those would be financial statements, I imagine, don't you think?
MR. LISNER: It's a subset of, but I take your point --
JUDGE KAPLAN: I am quite familiar with that.
MR. LISNER: Thank you, your Honor.
MR. LISNER: Company contracts?
KUNGYU MATTHEW HUANG: Actually, typically, we focus more on the business case and business metrics that we receive. But, yes, occasionally we will do deeper legal due diligence in some cases, but not always.
MR. LISNER: Turning to FTX in particular, do you recall that Paradigm received access to what's called an electronic data room?
KUNGYU MATTHEW HUANG: I do.
MR. LISNER: An electronic data room is essentially a computer folder where one person, in this case FTX, could upload documents for someone else to review?
KUNGYU MATTHEW HUANG: That's right.
MR. LISNER: This is standard in the investment community?
KUNGYU MATTHEW HUANG: Yes, relatively standard.
MR. LISNER: In reviewing information provided by FTX, you testified that you asked questions of FTX's management?
KUNGYU MATTHEW HUANG: That's right.
MR. LISNER: And they gave you answers and you had follow-up questions I'm sure?
KUNGYU MATTHEW HUANG: That's right.
MR. LISNER: And you were satisfied with the responses you received?
KUNGYU MATTHEW HUANG: On the whole, yes. That's why we subsequently ultimately invested.
MR. LISNER: Who initiated contact between FTX and Paradigm for a potential investment?
KUNGYU MATTHEW HUANG: I don't recall exactly. Initiated with my team member Arjun Balaji. I don't know exactly whether he contacted the company or vice-versa.
MR. LISNER: You testified on direct that you considered a number of factors in a potential investment, including concerns that Paradigm and yourself had about FTX's corporate governance, true?
KUNGYU MATTHEW HUANG: That's right.
MR. LISNER: Is corporate governance that refers generally to the rules and practices that a company follows and applies to themself?
KUNGYU MATTHEW HUANG: What I understand it to mean and what I believe it to have meant when we discussed it was around the general practices of the company, as well as a way of adjudicating certain conflicts that might arise between the company and ourselves as investors or other parties, like employees or customers.
MR. LISNER: And with respect to a potential investment in FTX, Paradigm was concerned that FTX had no board of directors, true?
KUNGYU MATTHEW HUANG: That's right.
MR. LISNER: And can you describe what a board of directors does at a general high level?
KUNGYU MATTHEW HUANG: Generally, they serve a governing role to the CEO and executive team of the company, and they approve certain transactions or decisions they have governance over.
MR. LISNER: Fair to say that a board of directors oversees and supervises company management?
KUNGYU MATTHEW HUANG: That's fair to say.
MR. LISNER: And fair to say that a corporate board is typically made up of experienced business professionals?
KUNGYU MATTHEW HUANG: That's fair to say.
MR. LISNER: And you knew before you made an investment or before Paradigm made an investment that FTX did not have a board of directors at all, true?
KUNGYU MATTHEW HUANG: That's true.
MR. LISNER: Fair to say you think every $20 billion company should have a board of directors?
JUDGE KAPLAN: Sustained.
MR. LISNER: Did FTX's lack of a board of directors weigh against making a potential investment in the company?
KUNGYU MATTHEW HUANG: I would say that it was a negative factor that we considered, and we actually pressed SBF on the idea of creating a board. It's not uncommon for investors, especially in a round as large as this, to request board seats, and we know that we weren't the only investor that had requested that. Our understanding was that SBF was very resistant to having investors on the board. I don't think he thought -- he told us that he didn't think investors had that much to add, but he did represent that he would be creating a board at some point and to be filling it with experienced business executives that could help with the business.
MR. LISNER: By the time you invested, there was no board of directors?
KUNGYU MATTHEW HUANG: That's right.
MR. LISNER: And that caused Paradigm to walk away from the deal?
JUDGE KAPLAN: Obviously.
MR. LISNER: Thank you, your Honor.
MR. LISNER: Fair to say that the lack of a board of directors was not a material factor to your investment decision?
JUDGE KAPLAN: Look. Come to the sidebar.
(Continued on next page)
(At sidebar)
JUDGE KAPLAN: First of all, you either just crossed a motion in limine ruling that I made or you are right at the very edge in suggesting that the investment loss was the product of gullibility and negligence by the investor.
Number two, you've been over this already six ways to Sunday and you got your answer. Move on. The goal here is not to set a record for the longest trial. It's to have the fairest trial. Let's get moving.
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(In open court)
MR. LISNER: Thank you, your Honor.
MR. LISNER: At the time that Paradigm chose to invest in FTX, was it your understanding that Mr. Bankman-Fried owned the overwhelming majority of FTX?
MR. LISNER: Do you recall if that percent was approximately 80 percent of the company?
KUNGYU MATTHEW HUANG: I don't recall exactly.
MR. LISNER: Did that factor weigh in favor or against a potential investment in FTX?
KUNGYU MATTHEW HUANG: I would say it's neutral. It's what we expected to be the case generally.
MR. LISNER: You testified that Paradigm also had concerns about FTX's relationship with Alameda, true?
KUNGYU MATTHEW HUANG: That's right.
MR. LISNER: And you testified on direct that --
MR. LISNER: Your Honor, could I request a sidebar?
JUDGE KAPLAN: All right.
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(At sidebar)
MR. LISNER: I think we could skip the sidebar.
MR. COHEN: We are going to skip the sidebar.
Your Honor, if I might come back to your Honor's comment before. As I understand the direct, they are presenting him as a sophisticated witness and got essentially lay expert testimony from him. I don't understand how this comes up against the idea of gullibility, which might be appropriate for a customer who they questioned as the first witness. The government was presenting him, in effect, as an expert on exchanges.
JUDGE KAPLAN: There is no such thing as, in effect, an expert. They had an obligation to make disclosure if he was called as an expert. They didn't. If there was an objection to his giving testimony as an expert, you should have made it.
MR. COHEN: Your Honor, they drew out from him testimony about how exchanges work, how the market works, and we believe we can cross on that since it was brought up on direct.
JUDGE KAPLAN: That's not what your colleague is doing. What your colleague is doing is repeating the direct and repeating the repetition of the direct, and then asking inappropriate questions on top of that.
MR. COHEN: I have your Honor's point on that. We will work on that tonight.
I am worried about going forward, your Honor, because I understand there is going to be other investor witnesses, sophisticated lenders who they are not presenting --
JUDGE KAPLAN: I have made rulings on a lot of that already.
MR. COHEN: The last thing we want to do is run afoul of your rulings.
JUDGE KAPLAN: I accept that, Mr. Cohen.
MR. COHEN: We don't agree with that, but we are going to follow it.
JUDGE KAPLAN: I understand that. I have absolutely no concerns about bad faith or anything like that. To the contrary.
MR. COHEN: We are trying to follow, but this was a little different, at least from what I expected, in terms of how they present it, and they are entitled to, it's their case, but we need to be able to cross-examine on that.
JUDGE KAPLAN: Of course you do, and you have every opportunity to do it.
MR. COHEN: Understood.
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(In open court)
MR. LISNER: Thank you, your Honor.
JUDGE KAPLAN: Let's proceed.
BY MR. LISNER:
MR. LISNER: Mr. Huang, you testified——you were asked on direct: Do you recall what effect it would have been if you were told that Alameda was using customer assets or was involved in customer assets, correct?
KUNGYU MATTHEW HUANG: Could you repeat that.
MR. LISNER: On direct were you asked about whether you were told about Alameda's relationship or use of customer assets on FTX?
KUNGYU MATTHEW HUANG: Yeah.
MR. LISNER: Can we publish to the witness and the Court DX 787.
JUDGE KAPLAN: Did you say D or G?
MR. LISNER: D, Defense Exhibit 787.
MR. LISNER: Do you recognize this to be an audited set of financials from FTX that were provided to Paradigm?
MR. LISNER: Your Honor, I'd like to introduce this for a nonhearsay purpose of the information that was disclosed by the company to a potential investor.
JUDGE KAPLAN: I'm sorry?
JUDGE KAPLAN: Well, neither have I.
BY MR. LISNER:
MR. LISNER: Mr. Huang, do you recall reviewing this document in connection with researching a potential investment in FTX?
KUNGYU MATTHEW HUANG: I don't recall reviewing it prior to the investment, and my——I'm not sure if I recall whether it was available or not.
MR. LISNER: No further questions, your Honor.
JUDGE KAPLAN: Okay. Thank you.
Any redirect?
JUDGE KAPLAN: All right. Thank you. You're excused, Mr. Huang.
(Witness excused)
JUDGE KAPLAN: Next witness.
COURT CLERK: Remain standing and raise your right hand for a moment.
(Witness sworn)
COURT CLERK: Thank you. Please be seated.
Pull your chair up to the microphone and please state your name and spell your last name for the record.
KUNGYU MATTHEW HUANG: Gary Wang, W-A-N-G.
COURT CLERK: Thank you.
JUDGE KAPLAN: You may proceed, Mr. Roos.