Caroline Ellison, former chief executive officer of Alameda Research LLC, center, arrives at court in New York, US, on Tuesday, Oct. 10, 2023.
Yuki Iwamura | Bloomberg | Getty Images
In sentencing FTX founder Sam Bankman-Fried to a 25-year prison sentence on Thursday, Judge Lewis Kaplan cited testimony from Caroline Ellison, an ex-girlfriend of the defendant and early recruit into his crypto enterprise.
“I keep coming back to Ms. Ellison’s testimony that he knew it was wrong,” Kaplan said at the sentencing hearing in downtown Manhattan. “He knew it was criminal.”
Ellison was the star witness for the Department of Justice in its prosecution of Bankman-Fried. She agreed to a plea deal in December 2022, a month after FTX spiraled into bankruptcy.
As part of her testimony at the criminal trial late last year, Ellison supplied the government and the 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 after the sentencing on Thursday that Bankman-Fried’s “deliberate and ongoing lies demonstrated a brazen disregard for his customers’ expectations and disrespect for the rule of law, all so that he could secretly use his customers’ 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 laundering.
Though Ellison faces similar sentencing guidelines to Bankman-Fried, she’s expected to receive a far more lenient sentence due to her role as a cooperating witness.
Caroline Ellison is questioned as Sam Bankman-Fried watches during his fraud trial before U.S. District Judge Lewis Kaplan over the collapse of FTX, the bankrupt cryptocurrency exchange, at 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 Bankman-Fried’s crypto orbit in 2017.
She’d been working as a trader at Jane Street, where Bankman-Fried got his start in finance. Bankman-Fried had reportedly convinced the Stanford grad to ditch 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 on-again, off-again girlfriend and, at times, his roommate. She followed Bankman-Fried from California to Hong Kong and ultimately to the Bahamas, as Bankman-Fried repeatedly shifted headquarters for his crypto companies.
Michael Lewis wrote about Ellison in his book, “Going Infinite,” which covered Bankman-Fried’s rise and fall. In 2021, Ellison was promoted to CEO of Alameda, a job for which, according to Lewis’s reporting, neither Ellison nor Bankman-Fried found her particularly well 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 that Ellison had sent Bankman-Fried. “It feels like I’m doing a much worse job managing Alameda than you would if you were working on 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 of her couch and go for a hike.
Court filings show that Ellison’s compensation paled in comparison to other top executives. Of the $3.2 billion in payouts to the exchange’s founders and other senior employees, FTX’s head of engineering Nishad Singh received $587 million, co-founder Gary Wang got $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 about 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 Google document from February 2022 shared with the Times, Ellison wrote, “I have been feeling pretty unhappy and overwhelmed with my job…At the end of the day I can’t wait to go 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 fix problems’
But it was in the courtroom that jurors got to hear 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, he was still calling the shots at Alameda.” Over the course of her multi-day testimony, Ellison helped prosecutors build a narrative that she was acting at the direction of Bankman-Fried in helping him steal customer money from FTX and using it to help prop up Alameda, which was suffering in the wake of the crypto winter.
Ellison said Bankman-Fried was still CEO of Alameda when the funneling of money began. She said she was under the impression that it was FTX customer money because the sums exceeded the exchange’s profits and the amount of capital it had raised.
In mid-2021, when FTX bought equity in the company back from 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 various points from 2019 to November 2022. There were problems long before the alleged criminal behavior took place.
On one of her Google Docs, Ellison had a section entitled “limiting factors in scaling,” which she said referred to things that were holding back Alameda. The first thing she listed was management, including a comment on her former co-CEO Sam Trabucco.
“I feel like neither Trabucco nor I has been doing a great job of pushing on stuff,” she wrote. “We’re in the mode of maintaining status quo and trying to fix problems.”
In terms of the comingling of operations between FTX and Alameda, Ellison admitted on the witness stand that the two firms didn’t have a proper “Chinese wall” separating the businesses.
During her testimony, Ellison mostly avoided eye contact with Bankman-Fried, staring down at her hands between questions and frequently flipping her hair over her left shoulder. Bankman-Fried also often looked away, with hands clenched.
Ellison told the jury that her breakup with Bankman-Fried in the spring of 2022 affected communications between the two of them. They would talk mostly over Signal despite living in the same apartment, and they 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 has laughed, visibly shaken his head, and scoffed,” which she said could be having an effect on Ellison “given the history of this relationship, the prior attempts to intimidate her, the power dynamic, their romantic relationship.”
Caroline Ellison, former chief executive officer of Alameda Research LLC, arrives to court in New York, US, on 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 encrypted app Signal was among the most calamitous for Bankman-Fried.
The government presented a series of Signal exchanges involving Bankman-Fried, Ellison, Wang and other top execs. In one such exchange, from Nov. 8, 2022, Ellison appealed to Bankman-Fried and other members of the inner circle, asking for help on optics and public messaging.
Prosecutors are relying heavily on text messages sent among FTX and Alameda Research executives in the case against Sam Bankman-Fried.
Source: SDNY
She wrote, “multiple people internally asking me whether they should continue to make statements to external parties like ‘Alameda is solvent.’ should i suggest they stall instead? just stall on responding to their messages? or what?”
That day, FTX issued a pause on all customer withdrawals.
The following day, Ellison again looked to the group for guidance about how to handle an all-hands meeting for Alameda’s roughly 30 employees.
Ellison’s proposal was to tell them, “Alameda is probably going to wind down” and that there was “no pressure” to stay but help with “stuff like making sure our lenders get paid” would be “super appreciated.”
Bankman-Fried suggested she say something about there “being a future of some sort for those who are excited.”
Prosecutors are relying heavily on text messages sent among FTX and Alameda Research executives in the case against Sam Bankman-Fried.
Source: SDNY
Ellison ended up divulging a lot more than that in the staff meeting, a secret recording of which was played for the jury.
“Alameda borrowed a bunch of money,” which it used to make investments, Ellison said at the meeting. But as crypto prices fell, “FTX had a shortfall of user funds” and then “users started withdrawing their funds” and they “realized they would not be able to continue.”
When she was asked by a staffer whose idea it was to plug Alameda’s loan losses with FTX customer money, she said, “Um, Sam, I guess,” and giggled.
“FTX basically always allowed Alameda to, like, borrow user funds, as far as I know,” Ellison said.
