Welcome to Week Two
Welcome back to our live coverage of the trial of FTX founder Sam Bankman-Fried.
Caroline Ellison—onetime Alameda CEO, onetime SBF girlfriend—is set to testify today and it shows. There were over 10 people in line at the courthouse before 6am, including some very dedicated members of the public.
The current plan is to finish cross-examination of FTX CTO Gary Wang in the morning and then move on to the star witness, who has already pleaded guilty to fraud and is cooperating with the government. The prosecution previously indicated that it intends to bring in Ellison’s personal documents as part of her testimony, including a note called “Things Sam is Freaking Out About.”
Ellison’s position at the top of Alameda Research, and her personal relationship with Bankman-Fried, means her testimony will likely be central to the trial.
The alleged fraud at the heart of the Department of Justice’s case against Bankman-Fried hinges on the close links between crypto trading company Alameda and crypto exchange FTX. Bankman-Fried cofounded both companies, and the DoJ alleges that FTX used customer deposits to fund Alameda’s bets on the crypto markets. Ellison has already pleaded guilty to fraud and conspiracy charges, and is cooperating with the DoJ.
In August, Bankman-Fried had his bail revoked after he allegedly shared Ellison’s private writings with the New York Times, which published a controversial story about her state of mind as her company was spiraling towards bankruptcy.
As much as her testimony will be critical for the prosecution, which is trying to prove that the FTX CEO knowingly deceived investors about the state of the business, the courtroom is likely to be packed with reporters hoping that Ellison will reciprocate, and reveal intimate details of Bankman-Fried’s lifestyle and relationships.
Like a lot of observers in the cybersecurity community, I’ve been watching news of SBF’s trial for any new information about another, very specific crime carried out in the midst of FTX’s meltdown: On November 11, the same day the exchange declared bankruptcy, unidentified thieves stole more than $400 million of its remaining crypto funds.
The culprit remains a mystery. In the meantime, I’ve reported the blow-by-blow story of FTX’s all-night crisis response to that heist, in which the exchange’s staff and bankruptcy consultants scrambled to try to save another $1 billion from being stolen.
People in the crypto community tend to recoil from the idea that it’s crypto, not just Sam Bankman-Fried, that is on trial in New York. And maybe crypto has suffered enough.
In the months leading up to the collapse of Bankman-Fried’s FTX exchange crypto markets tumbled, investment companies fell apart and fortunes were lost. The depths of the so-called “crypto winter” that followed can be seen in new data from Pitchbook, which shows that venture capital investment in crypto companies in September 2023 totalled $508 million, less than a third of what it was in November 2022, the month FTX collapsed.
Even a $1 billion fund put together by Binance founder Changpeng Zhao in the aftermath of the meltdown has failed to find companies to invest in, with less than $30 million committed to crypto startups, according to Bloomberg.
Caroline Ellison, the former CEO of Alameda Research, is expected to take the stand today after lunch. She arrived at court in Manhattan earlier this morning.
You can read more about Ellison, and the other key witnesses in the trial, in our in-depth explainer.
PHOTOGRAPH: STEPHANIE KEITH/GETTY IMAHGES
This Morning in Court
The morning session, which focused on the cross-examination of Gary Wang, saw the defense continuing its “SBF made reasonable business decisions” tactic. They emphasized that Bankman-Fried did want to pay back Alameda lenders, that Alameda had a positive net asset value (though Wang pointed out that these assets weren’t easily available) and tried again to say that the problem was that FTX didn’t have access to liquid assets, not that FTX didn’t have the assets at all.
Both sides discussed the loans that Wang took from Alameda to make investments in other companies, which he claims he signed because he trusted Bankman-Fried, but didn’t know what they were used for. A final part of Wang’s testimony focused on he and SBF turning over FTX assets to Bahamian regulators.
The defense tried to argue that they did this because they were ordered to, at the risk of going to jail if they disobeyed, but the prosecution showed that said order came via email after SBF had already started meeting with authorities.
After Wang’s testimony, Caroline Ellison, wearing a gray blazer and light red crepe dress, was called to the stand. She seemed to have trouble finding and identifying SBF in court (to be fair, his suit getup is quite different from his normal attire)—after doing so, she got as far as admitting to committing financial crimes under SBF’s direction before we broke for lunch.
It was widely anticipated that Caroline Ellison would provide the standout moments of the trial so far, and her brief time on the stand before the lunch break showed why.
Asked by the prosecution if she committed any crimes while working at Alameda, Ellison responded “yes, we did.” Asked who directed her to commit these crimes, she said it was Bankman-Fried.
Ellison’s testimony is continuing in court right now and we’ll have more updates soon.
Memos and Spreadsheets
This afternoon, the prosecution used Caroline Ellison’s memos and spreadsheets to show just how much risk Bankman-Fried was apparently willing to take.
Assistant US attorney Danielle Sassoon spent much of her time going through documents Ellison had supplied, in particular one from the fall of 2021 in which SBF had asked her to game out the consequences of a “10th percentile scenario.”
At the time, Bankman-Fried apparently wanted to spend $3 billion on venture investments, but, he asked, what would happen if he did that and the crypto market went down, existing venture investments and stocks all went down, cryptocurrency company Genesis stopped letting Alameda use its own FTT tokens as collateral, and there was bad FTX news that made it harder for them to raise equity?
According to Ellison’s analysis, investing the $3 billion would put Alameda at extreme risk and make it essentially impossible for the company to pay up if lenders recalled loans.
In response, Ellison said Bankman-Fried suggested changing the these loans from open-term (meaning they could be recalled at any time) to fixed-term—but went ahead and created a $2 billion venture fund anyway.
While drilling Ellison on the details of her various spreadsheets, the prosecution repeatedly asked her whether her calculations already included the FTX customer deposits.
Yes, she said. Why? Because they had always been available and used before; in effect, both Bankman-Fried and Ellison took for granted that customer deposits from FTX would be used to help Alameda.
When not explaining her spreadsheets line by line, Ellison shared quotes that added a bit of character color.
Bankman-Fried once allegedly told her that he thought he had a 5 percent chance of becoming president of the United States, and that he was the type of person who’d be willing to flip a coin if tails meant the world would be destroyed but heads meant it would be twice as good.
That’s it for our live coverage of the trial of Sam Bankman-Fried for today. The trial continues tomorrow, with the rest of Ellison’s testimony likely taking up much of the day. My colleague Angela Chen will be there once again to bring you all the details. Thanks for reading.
Star witness says FTX head Sam Bankman-Fried told her to commit crimes, mislead lenders
Caroline Ellison, former co-CEO of Alameda Research and ex-girlfriend of Bankman-Fried, testified against him Tuesday.
Oct. 10, 2023, 11:21 PM CST / Updated Oct. 11, 2023, 4:11 AM CST / Source: NBC News
Caroline Ellison testified that FTX co-founder Sam Bankman-Fried told her to steal money from FTX’s customers and use it to repay firms that had lent money to Alameda Research, the crypto trading firm Ellison was leading.
“Sam directed me to commit these crimes,” Ellison said in court Tuesday after she told prosecutors that she, Bankman-Fried and others had committed fraud.
Ellison, who at various times also dated and lived with Bankman-Fried, said Alameda took about $10 billion from customers who had put their money on the FTX exchange to trade digital currencies. She said Bankman-Fried set up the system that let her move the money.
She also said Bankman-Fried directed her to send balance sheets to lenders that made Alameda’s losses look less risky.
Her testimony follows that of FTX co-founder Gary Wang, also a witness for the prosecution. Both were charged with a series of financial crimes in December, and Ellison 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.
Bankman-Fried faces seven federal charges, including wire fraud, securities fraud and money laundering, which could put him in prison for the rest of his life. He is scheduled to face additional charges at a separate trial in March. He has pleaded not guilty to all of the charges in both cases.
The Securities and Exchange Commission said in December that, at Bankman-Fried’s direction, Ellison manipulated the price of a digital token FTX had issued and used it as collateral for undisclosed loans Alameda took from FTX. That means Alameda, the trading firm, was secretly using money that belonged to FTX customers to repay debts and cover losses it had sustained.
It also meant Alameda was telling investors it had more collateral to back up its loans than it really did, making the FTX exchange look safer than it was.
Ellison started at Alameda as a trader in 2018. She testified Tuesday that after the hedge fund suffered large losses that year, Bankman-Fried made getting more money a top priority. To that end, he told Alameda employees to get loans on any terms they could, and he created the digital token FTT. She said Alameda owned 60% to 70% of the supply of the coin, which cost essentially nothing to make. When its market price rose from an initial 10 cents to $50 over time, Alameda gained billions.
Ellison, who became co-CEO of Alameda in October 2021, said that Bankman-Fried told her to put those billions in FTT on the balance sheet so Alameda could borrow money and that he persuaded her to proceed even though she initially felt it was misleading.
Alameda later did the same with other coins.
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She also testified that Alameda made $5 billion in personal loans to company insiders. Some of those loans were risky because they could be called in at any time, and she said there were enough of them to bankrupt Alameda if they all became due and payable immediately.
While Ellison was officially in charge of Alameda, prosecutors say Bankman-Fried was calling the shots and was responsible for those schemes. Bankman-Fried’s lawyers have argued that Ellison was fully responsible and that she mismanaged the company.
For a short time, FTX was one of the biggest names during a boom in the digital currency industry. It struck sponsorship deals with sports teams and ran a star-studded Super Bowl commercial. Bankman-Fried’s personal wealth was estimated in the tens of billions, primarily because of his ownership stake in the company.
Alameda and FTX quickly collapsed in November after CoinDesk reported on the tight links between the two firms and the liabilities Alameda had. One of FTX’s biggest rivals announced that it would sell its holdings of the digital token that made up much of Alameda’s balance sheet, which caused its value to crater.
Then, nervous customers started pulling their money from the FTX exchange. FTX could not give those customers their money back, in part because of the money it had lent to Alameda. It had to halt withdrawals, and within days, both companies filed for bankruptcy protection.
Ellison, like Wang before her, is cooperating with the government in exchange for a reduction in her sentence. Without such a deal, both faced sentences that could have kept them in prison for the rest of their lives.
Ellison and Wang both had close personal relationships with Bankman-Fried, or SBF, who appeared distressed at times by Wang’s testimony against him. Meanwhile, Ellison was one of the first people Bankman-Fried recruited to work with him, in 2017. Before that, they were co-workers at a trading firm in New York.
Bankman-Fried was sent to jail in August in advance of the trial after the government accused him of witness tampering. He had purportedly leaked diary entries from Ellison to The New York Times.
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