Caroline Ellison, former CEO of Alameda Research LLC, center, arrives at the courthouse on Tuesday, October 10, 2023, in New York, US.
Yuki Iwamura | Bloomberg | Getty Images
In sentencing FTX founder Sam Bankman-Fried to 25 years in prison on Thursday, Judge Lewis Kaplan cited testimony from Caroline Ellison, an ex-girlfriend of the defendant and an early recruit for his crypto venture.
“I keep coming back to Ms. Ellison’s testimony that he knew it was wrong,” Kaplan said during the sentencing hearing in downtown Manhattan. “He knew it was criminal.”
Ellison was the Justice Department’s star witness in the Bankman-Fried prosecution. She agreed to a settlement 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 jury with text messages, documents and secret recordings that ultimately helped lead to Bankman-Fried’s conviction on all seven charges against him.
Manhattan U.S. Attorney Damian Williams said in a statement Thursday after the sentencing that Bankman-Fried’s “deliberate and continued lies demonstrated a blatant disregard for his clients’ expectations and a lack of respect for the rule of law, all so that he could secretly use his customers’ information’. money to expand his own power and influence.”
Ellison, who ran FTX’s sister hedge fund Alameda Research, pleaded guilty to two counts of bank fraud, two counts of conspiracy to commit money fraud, conspiracy to commit commodities fraud, conspiracy to commit securities fraud and conspiracy to commit money laundering .
Although Ellison faces similar sentencing guidelines as Bankman-Fried, she is expected to receive a much more lenient sentence due to her role as a cooperating witness.
Caroline Ellison is questioned as Sam Bankman-Fried looks on during his fraud trial before U.S. District Judge Lewis Kaplan over the collapse of FTX, the bankrupt cryptocurrency exchange, in Federal Court in New York City, October 11, 2023 in this courtroom sketch.
Jane Rosenberg | Reuters
Ellison’s complicated ties to SBF
Ellison jumped into the Bankman-Fried crypto world in 2017.
She had worked as a trader in Jane Street, where Bankman-Fried got his start in the financial world. Bankman-Fried reportedly convinced the Stanford student to leave her Wall Street gig and join Alameda when the hedge fund was still in its original Bay Area office.
Ellison spent years as Bankman-Fried’s girlfriend and sometimes as his roommate. She followed Bankman-Fried from California to Hong Kong and eventually to Hong Kong the Bahamas, when Bankman-Fried repeatedly moved the headquarters for its crypto businesses.
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 job for which neither Ellison nor Bankman-Fried considered her particularly suited, according to Lewis’ reporting.
“Caroline felt that even when Sam promoted her to CEO of Alameda Research, he disapproved of her job performance – and she shared his view,” Lewis wrote.
Lewis shared an excerpt from one of the memos Ellison sent Bankman-Fried. “I feel like I’m doing a much worse job managing Alameda than if you were doing it full time,” she wrote.
In April 2021, Ellison tweeted about ‘regular amphetamine use’ in a thread that also talked about the “Herculean” effort it took for her to get off her couch and go for a walk.
Court filings show that Ellison’s compensation paled in comparison to that of other top executives. Of the $3.2 billion in payouts 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, which published a report on them last July, months before the trial. The act ultimately landed Bankman-Fried back in jail after Judge Lewis Kaplan revoked his bail for alleged witness tampering.
In a February 2022 Google Doc shared with the Times, Ellison wrote: “I’m feeling pretty unhappy and overwhelmed by my job… At the end of the day, I can’t wait to get home and turn off my phone.” and have a drink and get away from it all.”
She added: “It doesn’t really feel like there’s an end in sight.”
‘Trying to solve problems’
But it was in the courtroom that jurors first heard Ellison.
U.S. Attorney Thane Rehn said during the trial that Bankman-Fried “used her as a front” when he was “in reality still in charge of Alameda.” Over the course of her several days of testimony, Ellison helped prosecutors build a story that she acted at the behest of Bankman-Fried by helping him steal customer money from FTX and using it to prop up Alameda, which suffered in the aftermath . of the crypto winter.
Ellison said Bankman-Fried was still CEO of Alameda when the money diversion began. She said she was under the impression that the money was from FTX customers because the amounts exceeded the exchange’s profits and capital raised.
In mid-2021, when FTX bought back shares in the company from a rival exchange and early investor Binance, FTX used $1 billion in customer funds for the transaction, Ellison testified.
Ellison said she considered resigning from Alameda at several times between 2019 and November 2022. Problems existed long before the alleged criminal behavior occurred.
On one of her Google docs, Ellison had a section titled “constraints on scaling,” which she said pointed to things that were holding Alameda back. The first thing she listed was management, including a comment on her former co-CEO Sam Trabucco.
“I feel like neither Trabucco nor I have done a good job pushing things,” she wrote. “We are in the business of maintaining the status quo and trying to resolve issues.”
Regarding the merger of operations between FTX and Alameda, Ellison admitted on the witness stand that the two companies did not have a true “Chinese wall” separating the companies.
During her testimony, Ellison mostly avoided eye contact with Bankman-Fried, staring at her hands between questions and frequently brushing her hair over her left shoulder. Bankman-Fried also often looked away, with clenched hands.
Ellison told the jury that her split from Bankman-Fried in the spring of 2022 affected communication between the two of them. They talked mainly on Signal, despite living in the same apartment, and largely avoided each other outside of work.
Danielle Sassoon, the assistant U.S. attorney representing the government, told Judge Kaplan that “several times the defendant laughed, visibly shook his head and scoffed,” which she said could have an effect on Ellison “given the history of this relationship, the previous attempts to intimidate her, the power dynamics, their romantic relationship.”
Caroline Ellison, former CEO of Alameda Research LLC, will appear in court in New York, USA on Thursday, October 12, 2023.
Bloomberg | Bloomberg | Getty Images
Secret recordings and texts
Of the hundreds of items entered into evidence at the trial, a series of messages on the encrypted app Signal was among the most disastrous for Bankman-Fried.
The government presented a series of signaling exchanges involving Bankman-Fried, Ellison, Wang and other top officials. During one such exchange, from November 8, 2022, Ellison called on Bankman-Fried and other inner circle members, asking for assistance in optics and public messaging.
Prosecutors are relying heavily on text messages sent between FTX and Alameda Research executives in the case against Sam Bankman-Fried.
Source: SDNY
She wrote: ‘Several people asked me internally whether they should continue making statements to external parties such as ‘Alameda is solvent.’ should I suggest they wait instead? just wait to respond to their messages? or what?”
That day, FTX issued a pause on all customer withdrawals.
The next day, Ellison looked to the group again for advice on how to deal with diabetes meeting for the approximately 30 Alameda employees.
Ellison’s proposal was to tell them, “Alameda is probably going to wind down” and that there was “no pressure” to stay, but that help with “things like making sure our lenders get paid” would be “super appreciated.”
Bankman-Fried suggested she say something about “there being some kind of future for those who are excited.”
Prosecutors are relying heavily on text messages sent between FTX and Alameda Research executives in the case against Sam Bankman-Fried.
Source: SDNY
Ellison ultimately revealed much more than that during the staff meeting, a secret recording of which was played for the jury.
“Alameda has borrowed a lot of money,” Ellison said at the meeting, which it used to invest. But when crypto prices fell, “FTX was short of user funds” and then “users started withdrawing their funds” and they “realized they wouldn’t be able to continue.”
When asked by an employee whose idea it was to offset Alameda’s loan losses with FTX customer money, she said, “Uh, Sam, I guess,” and giggled.
“FTX has basically always allowed Alameda to lend user funds, as far as I know,” Ellison said.
WATCH: Sam Bankman-Fried sentenced to 25 years in prison