Caroline Ellison Says Bankman-Fried steered FTX deception, collapse

Former deputy — and sometime girlfriend — testifies crypto exchange’s founder approved use of customer funds, endorsed risky bets.

Caroline Ellison, former CEO of Alameda Research LLC, leaves Manhattan Federal Court after testifying during the trial of FTX CEO Sam Bankman-Fried in New York. Picture: Michael M. Santiago/Getty Images

Caroline Ellison, a top deputy of Sam Bankman-Fried, testified the FTX founder ordered her and others to commit criminally fraudulent acts that contributed to the collapse of the exchange last year.

Ellison, 28 years old, took the witness stand Tuesday just before lunch in the criminal trial of Bankman-Fried, who is charged with an array of fraud and conspiracy offenses and has pleaded not guilty. Dressed in a grey coat and a dark pink dress, Ellison said that she and Bankman-Fried together defrauded FTX customers, investors and lenders.

“He directed me to commit these crimes,” she told the jury.

Ellison, a onetime romantic partner of Bankman-Fried who ran his crypto hedge fund, Alameda Research, is perhaps the most central witness for federal prosecutors. They secured her cooperation as part of a guilty plea in December that could result in her receiving leniency when she is sentenced for crimes including fraud and money laundering.

Over hours of afternoon testimony, Ellison, soft-spoken but poised, said she and Bankman-Fried knew for months about Alameda’s increasingly precarious financial situation and fretted over how, and whether, they could keep the operation from melting down. Alameda was central to FTX’s downfall, prosecutors allege, because the sister hedge fund had been secretly and illegally taking billions of dollars from FTX customer deposits.

She and Bankman-Fried analysed Alameda’s shaky finances together, she said. The hedge fund loaded up on hard-to-sell cryptocurrencies, made risky venture investments and took out loans that could be recalled by lenders anytime, she said. One of her analyses showed that Alameda had a net asset value of negative $US2.7bn ($4.20bn) in 2021.

Still, Bankman-Fried wanted to go ahead with the venture investments despite the severe risks they posed to Alameda. Soon after, a pair of cryptocurrencies collapsed, wiping out $US40bn of market value and setting off a chain of high-profile company failures. Prices of major digital currencies tanked and several crypto lenders filed for bankruptcy.

“Did things get worse?” asked Assistant US Attorney Danielle Sassoon. “Yes, they did,” Ellison replied.

Ellison described Bankman-Fried as comfortable with risk. She recalled that Bankman-Fried once posed a coin-flip scenario where if the coin landed on tails, the world would end. But if the coin landed on heads, “the world would be twice as good.” Bankman-Fried said he would take the bet if there were a chance of making the world better, Ellison said.

Her personal and professional relationship with Bankman-Fried overlapped. “The whole time that we were dating, he was also my boss at work, which created some awkward situations,” she recalled. The two dated on and off for two years.

During one break in their relationship, Bankman-Fried promoted her to co-chief executive of Alameda Research. At the time, he said he wanted to distance himself from Alameda because he was running FTX. The new title didn’t come with a raise, Ellison said, and she continued to make the $US200,000-a-year salary that she made as an Alameda trader. In 2021, she took home a bonus of $US20m.

A few months after the promotion, the two began dating again, Ellison said, but they continued to struggle as a couple. Ellison said she wanted more from the relationship, but “I felt like he was distant or not paying attention to me.” Bankman-Fried also still continued to call the shots at Alameda, Ellison testified.

“He was the person I officially reported to,” she said. “He owned the company. And he was the one who set my compensation and had the ability to fire me.” Ellison will return to the stand on Wednesday and is expected to testify all day.

Prosecuting a once-in-a-generation fraud case, the US attorney’s office in Manhattan chose to bring out its big guns right at the beginning of the proceedings. In addition to Ellison, prosecutors already have presented testimony from another top cooperating witness who was a member of Bankman-Fried’s inner circle: former FTX chief technology officer Gary Wang, whose appearance wrapped up on Tuesday morning.

Wang told jurors that Bankman-Fried lied to customers, assuring them that FTX was in stable financial shape when it wasn’t. He also testified that Alameda had virtually unlimited borrowing privileges on FTX and Bankman-Fried knew for months that the hedge fund was amassing billions of dollars in losses.

The trial, which began last week, is expected to run through mid-November. Other early witnesses included Adam Yedidia, a college friend of Bankman-Fried who testified that he quit his job at FTX when he learned that Alameda had been using FTX customer deposits to pay back creditors.

Bankman-Fried has acknowledged that there were a string of serious management mistakes at FTX but has said he didn’t commit a crime and didn’t knowingly take FTX customer funds.

His lawyers have argued that the government is falsely portraying him as a cartoonish villain when in reality he acted in good faith to build his crypto exchange in the emerging cryptocurrency space.

The Wall Street Journal