Caroline Ellison, former CEO of Alameda Research LLC, appears in court in New York, U.S., Tuesday, Oct. 10, 2023.
Yuki Iwamura | Bloomberg | Getty Images
In sentencing FTX founder Sam Bankman-Fried to 25 years in prison on Thursday, Judge Lewis Kaplan cited the testimony of Caroline Ellison, the defendant’s ex-girlfriend and recruit to his crypto business.
“I keep coming back to Ms. Ellison’s testimony that she knew it was wrong,” Kaplan said at the sentencing hearing in midtown Manhattan. “He knew it was criminal.”
Ellison was the Justice Department’s lead prosecutor in the Bankman-Fried prosecution. He agreed to a plea deal in December 2022, a month after FTX filed for bankruptcy.
As part of her testimony at the criminal trial late last year, Ellison provided the government and the jury with text messages, documents and secret recordings that ultimately helped convict Bankman-Fried of all seven counts against him.
Manhattan District Attorney Damian Williams said in a statement after Thursday’s sentencing that Bankman-Fried’s willful and continued lies showed a brazen disregard for his clients’ expectations and a lack of respect for the rule of law, all so that he could secretly use his clients. money to expand his own power and influence.”
Ellison, who ran FTX’s sister hedge fund Alameda Research, pleaded guilty to two counts of wire fraud, two counts of conspiracy to commit wire fraud, conspiracy to commit commodities fraud, conspiracy to commit securities fraud and conspiracy to commit money.
Although Ellison faces similar sentencing guidelines as Bankman-Fried, she is expected to receive a much lighter sentence because of her role as a cooperating witness.
Caroline Ellison is questioned as Sam Bankman-Fried watches his fraud trial before US District Judge Lewis Kaplan regarding the collapse of the failed cryptocurrency exchange FTX in New York Federal Court, October 11, 2023 in this the sketch of the courtroom.
Jane Rosenberg | Reuters
Ellison’s complicated ties to the SBF
Ellison jumped on the Bankman-Fried crypto bandwagon in 2017.
He worked as a merchant on Jane Street, where Bankman-Fried got his start in finance. Bankman-Fried reportedly convinced the Stanford graduate to quit her Wall Street gig and join Alameda when the hedge fund was still based in its original Bay Area office.
Ellison spent years as Bankman-Fried’s on-again, off-again girlfriend and, at times, roommate. He followed Bankman-Fried from California to Hong Kong and finally in the Bahamas, as Bankman-Fried repeatedly moved headquarters for his crypto companies.
Michael Lewis wrote about Ellison in his book “Going Infinite”, which covered the rise and fall of Bankman-Fried. In 2021, Ellison was promoted to CEO of Alameda, a position for which, according to Lewis’ reports, neither Ellison nor Bankman-Fried felt particularly suited.
“Caroline sensed that, even as Sam promoted her to CEO of Alameda Research, he disapproved of her job performance — and she shared his opinion,” Lewis wrote.
Lewis shared an excerpt from one of the memos Ellison had sent to Bankman-Fried. “I feel like I’m doing a much worse job running Alameda than you would if you were working at it full-time,” he wrote.
In April 2021, Ellison tweeted on “regular amphetamine use” in a thread that also talked about the “Herculean” effort it took to get off her couch and go for a hike.
Court records show that Ellison’s compensation pales in comparison to other top strains. Of the $3.2 billion in payments to the exchange’s founders and other senior employees, FTX chief engineering officer Nishad Singh received $587 million, co-founder Gary Wang received $246 million and $2.2 billion went to Bankman -Fried. Ellison received $6 million.
Some of Ellison’s private diary entries were leaked by Bankman-Fried to the New York Times, who published report about them last July, months before the trial. The act eventually landed Bankman-Fried back in prison after Kaplan revoked his bail for allegedly tampering with a witness.
In a Google document from February 2022 shared with the Times, Ellison wrote: “I’ve been feeling pretty unhappy and overwhelmed with my work… At the end of the day I look forward to going home and turning off my phone and having a drink and get away from everything.”
He added: “There doesn’t seem to be an end.”
“Trying to fix problems”
But it was in the courtroom that jurors heard from Ellison for the first time.
U.S. Attorney Thane Rehn said during the trial that Bankman-Fried was “using her as a front” when “in reality, she was still shooting Alameda.” During her days-long testimony, Ellison helped prosecutors craft a narrative that she was acting under Bankman-Fried’s direction by helping him steal customer money from FTX and use it to support Alameda, which suffered in the aftermath . of crypto winter.
Ellison said Bankman-Fried was still Alameda’s CEO when the funneling of money began. He said he was under the impression it was FTX client money because the amounts exceeded the stock’s profits and the amount of capital he had raised.
In mid-2021, when FTX bought shares in the company from a competing stock exchange and an early investor Binance, FTX used $1 billion in customer funds for the transaction, Ellison testified.
Ellison said she considered resigning from Alameda at various points between 2019 and November 2022.
In one of the Google Docs, Ellison had a section titled “Limiting Factors to Scaling,” which he said addressed things that were holding Alameda back. The first thing she mentioned was management, including a comment about her former co-CEO Sam Trabucco.
“I feel like neither Trabucco nor I have done a great job of pushing things,” he wrote. “We’re in a status quo mode and trying to fix the problems.”
Regarding the business combination between FTX and Alameda, Ellison admitted on the witness stand that the two companies did not have a proper “Chinese wall” separating the businesses.
During her testimony, Ellison mostly avoided eye contact with Bankman-Fried, looking down at her hands between questions and frequently flipping her hair over her left shoulder. Bankman-Fried also often looked away, hands clenched.
Ellison told the jury that her split from Bankman-Fried in the spring of 2022 affected communication between the two. They mostly talked about Signal despite living in the same apartment and largely avoiding each other outside of work.
Danielle Sassoon, the assistant U.S. attorney representing the government, told Kaplan several times “the defendant has laughed, visibly shook his head and scoffed,” which she said could have had an effect on Ellison “given his history of the relationship, trying to intimidate her, the power dynamic, their romantic relationship.”
Caroline Ellison, former CEO of Alameda Research LLC, appears in court in New York, U.S., Thursday, Oct. 12, 2023.
Bloomberg | Bloomberg | Getty Images
Secret recordings and texts
Of the hundreds of items entered into evidence during the trial, a bank of messages on the encrypted Signal app was among the most damning to Bankman-Fried.
The government introduced a series of Signal exchanges involving Bankman-Fried, Ellison, Wang and other top executives. In one such exchange, from November 8, 2022, Ellison appealed to Bankman-Fried and other inner circle members for help with visibility and public messaging.
Prosecutors relied heavily on text messages sent between FTX and Alameda Research executives in the case against Sam Bankman-Fried.
Source: SDNY
He wrote, “many people internally ask me if they should continue to make statements to external parties like ‘Alameda is solvent.’ should i suggest they stop? just stop replying to their messages? or what?”
On that day, FTX issued a freeze on all customer withdrawals.
The next day, Ellison looked to the team again for guidance on how to handle one all-hands meeting for Alameda’s approximately 30 employees.
Ellison’s suggestion was to tell them, “Alameda is probably going to collapse” and that there was “no pressure” to stay, but help with “things like making sure our creditors get paid” would be “overrated.”
Bankman-Fried suggested she say something about “it’s some future for those who are excited.”
Prosecutors relied heavily on text messages sent between FTX and Alameda Research executives in the case against Sam Bankman-Fried.
Source: SDNY
Ellison ended up revealing much more than that in the staff meeting, a secret recording of which was played for the jury.
“Alameda borrowed a lot of money,” which it used to make investments, Ellison said at the meeting. But as cryptocurrency prices fell, “FTX ran short of user funds,” and then “users started withdrawing their money” and “realized they couldn’t continue.”
When asked by an employee whose idea it was to cover Alameda’s loan losses with FTX customer money, he said, “Um, Sam, I guess,” and smiled.
“FTX has basically always allowed Alameda to borrow user funds as far as I know,” Ellison said.