12-10-2023 (NEW YORK) A startling revelation came to light as Caroline Ellison, a key adviser to cryptocurrency tycoon Sam Bankman-Fried, testified on Wednesday that she had repeatedly deceived the public at his behest. She confessed to fabricating information about his businesses and circulating deceptive financial documents to crypto lenders.
The breaking point arrived when Mr. Bankman-Fried’s two firms, FTX (a digital currency exchange) and Alameda Research (a hedge fund), crumbled in November. According to Ms. Ellison, the burden of lies became unbearable, and the companies’ implosions almost brought a sense of catharsis.
Ms. Ellison, aged 28, fought back tears as she described the tumultuous week when the companies failed, stating, “Overall it was the worst week of my life. I felt this sense of relief that I didn’t have to lie anymore, and that I could start taking responsibility even though I felt indescribably bad.”
Her testimony, on the second day of her appearance as a witness, marked the most emotional moment thus far in Mr. Bankman-Fried’s fraud trial. She was considered a crucial government witness due to her on-and-off relationship with Mr. Bankman-Fried over the years, which granted her unique insight as his crypto empire expanded. His trial, held in federal court in Manhattan, has evolved into a reckoning for high-risk practices across the crypto industry that resulted in billions of dollars in losses last year.
In the courtroom, Mr. Bankman-Fried, aged 31, displayed no visible reaction to Ms. Ellison’s testimony. During a break in the proceedings, he glanced at a group of reporters in the gallery and raised his eyebrows.
Mr. Bankman-Fried faces charges of orchestrating a scheme to turn FTX into his personal financial resource. Authorities allege that he misappropriated up to $10 billion from FTX customers to fund venture capital investments, purchase luxury real estate, make campaign contributions, and settle debts to Alameda. Ms. Ellison, who served as Alameda’s chief executive, has stated that she played a significant role in channeling FTX customer funds into Alameda’s coffers. In December, she pleaded guilty to fraud and conspiracy, agreeing to cooperate with prosecutors in exchange for leniency. Two other top FTX executives, Gary Wang and Nishad Singh, also pleaded guilty and are assisting the government.
Mr. Bankman-Fried has entered a plea of not guilty to seven criminal charges, including defrauding lenders. If convicted, he could potentially face a life sentence in prison.
Following the collapse of FTX, Ms. Ellison faced significantly more public scrutiny than the other cooperating witnesses. She and Mr. Bankman-Fried resided together in the Bahamas, where FTX was headquartered, and shared a tumultuous office romance as FTX grew into a $32 billion crypto giant. On Tuesday, Ms. Ellison shared intimate details about their relationship, including the workplace tensions it generated and her own concerns about Mr. Bankman-Fried’s feelings toward her.
On Wednesday, Ms. Ellison continued her testimony by discussing FTX’s financial troubles. She revealed that the exchange began to unravel in the spring of 2022 when the crypto market experienced a significant downturn.
Ms. Ellison disclosed that she had meticulously maintained spreadsheets that detailed Alameda’s debt to lenders and its reliance on customer deposits from FTX to repay those loans in the worst-case scenario. She claimed to have shared her analyses with Mr. Bankman-Fried.
The worst-case scenario materialized in June 2022 when Alameda’s lenders began demanding repayment. With Alameda’s crypto assets plummeting in value during the market downturn, the firm had limited means to satisfy its lenders.
“At that point, I was in a constant state of dread,” Ms. Ellison testified. At times, her testimony became emotional, prompting a court official to provide her with tissues as she struggled to hold back tears. She expressed her fear that if the public discovered that Alameda had been using FTX customer funds, “everything would come crashing down.”
Despite outlining the risks, she asserted that Mr. Bankman-Fried instructed her to use more customer deposits to repay the lenders. Ms. Ellison admitted to following his directives even though she knew “it was wrong.”
To conceal Alameda’s precarious financial situation, Ms. Ellison claimed that Mr. Bankman-Fried instructed her to provide a misleading balance sheet to one of the firm’s major lenders, a crypto company named Genesis, in the summer of 2022. This balance sheet concealed the fact that Alameda had borrowed approximately $10 billion from FTX customer funds.
“I didn’t want to be dishonest, but I also didn’t want them to know the truth,” she explained. She testified that she had dispatched similar “dishonest” balance sheets to other lenders prior to FTX’s collapse.
Their professional relationship deteriorated, and Ms. Ellison broke up with Mr. Bankman-Fried in the middle of 2022. During a heated discussion in August 2022, she became emotional and cried when he blamed her for Alameda’s financial problems. She testified that he accused her of not taking sufficient steps earlier in the year to mitigate Alameda’s trading risks in the crypto market.
“He was speaking loudly and strongly,” she recounted. “I got very upset, started crying, and I had trouble continuing the conversation.”
Ms. Ellison also discussed substantial payments made by Alameda in 2021 to unfreeze $1 billion held in trading accounts at two Chinese exchanges. In March, Mr. Bankman-Fried was charged with paying tens of millions in bribes to the Chinese government to regain access to those accounts.
While prosecutors subsequently opted to pursue the foreign bribery charge in a separate trial scheduled for next year, Judge Lewis. A. Kaplan allowed Ms. Ellison to discuss certain aspects of FTX’s efforts to unfreeze the funds. He reminded the jury that Mr. Bankman-Fried is not facing a bribery charge in this trial.
Ms. Ellison explained why she had acquiesced to Mr. Bankman-Fried’s schemes. Before the companies’ collapse, Mr. Bankman-Fried often described himself as a utilitarian, suggesting that he made decisions in the best interest of the greater good. He argued that rules like “don’t lie” or “don’t steal” did not align with his philosophy. Over time, this perspective began to influence her as well.
“It made me more willing to do things like lie or steal,” she stated.
Mr. Bankman-Fried’s defence team will have the opportunity to question Ms. Ellison when the trial resumes on Thursday.
