Caroline Ellison testified in court Acting on the instructions of SBF, embezzlement of approximately $14 billion in FTX client funds.

Caroline Ellison testified in court that she embezzled around $14 billion of FTX client funds on behalf of SBF.

Author: Mary Liu

The Manhattan courtroom was crowded on Tuesday as Caroline Ellison, the former girlfriend of SBF and former CEO of Alameda Research, appeared in court to testify. This was the first time the two had confronted each other since the collapse of the cryptocurrency trading companies FTX and Alameda Research, which they co-founded in November last year.

Although other FTX executives such as Gary Wang and Nishad Singh have a deep understanding of the structure and design of the exchange, Ellison has a unique perspective to discuss transaction affairs and the use of customer funds by Alameda and FTX. As a star witness for the government and the most widely discussed colleague of SBF to date, Ellison is a key figure in the trial and her testimony has attracted much attention.

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In her preliminary testimony of about 15 minutes, Caroline Ellison told the judge that she had engaged in fraudulent activities under the guidance of her ex-boyfriend, former colleague, and founder of FTX Exchange, Sam Bankman-Fried (SBF). SBF instructed her to withdraw funds from FTX customer funds and use them for risk investment and loan repayment at Alameda Research.

Ellison said, “Alameda misappropriated billions of dollars from FTX customers and used it for their own investments and repaying the lenders. In the end, we misappropriated approximately $14 billion, and only a portion of it was able to be repaid.“

Who is Ellison?

Caroline Ellison was born in Boston in 1994. Both of her parents are economics professors at MIT. She graduated from Stanford University in 2016 with a bachelor’s degree in mathematics.

Ellison was once the CEO of one of the most successful hedge funds in the cryptocurrency field and was the first member of SBF’s core circle to reach a plea agreement with prosecutors.

The two met more than five years ago at Jane Street Trading Company in New York. They bonded over their shared commitment to effective altruism, a popular philanthropic movement in the North American tech industry. Ellison testified that they started dating in the summer of 2020 and ended this complicated relationship in the spring of 2022.

When asked about her relationship with SBF by the prosecutor, Ellison said she was completely at a disadvantage in this relationship and SBF did not want others to know they were dating.

She said, “He was my boss at work, he owned the company, he set my salary, and he could fire me at any time.”

She said she eventually broke up with him because “he was often emotionally abusive or indifferent to me.”

Caroline told the judge that her annual salary was $200,000, with bonuses paid twice a year, and she earned a $21 million bonus in 2021, most of which she kept in the FTX exchange.

Memos and Spreadsheets

On that day, the prosecution used Caroline Ellison’s memos and spreadsheets to show how ambitious SBF was.

US Assistant Attorney Danielle Sassoon spent a lot of time reviewing the documents provided by Ellison, especially a document from the fall of 2021, in which SBF asked her to analyze the consequences of the “10% scenario”.

At the time, Bankman-Fried wanted to invest $3 billion in venture capital. The scenario was, if he did so, assuming a downturn in the cryptocurrency market, existing venture capital and stocks would all decline, and cryptocurrency company Genesis would stop lending. What would happen? Would the bad news from FTX make it more difficult for them to raise equity if Genesis stops allowing Alameda to use FTT tokens as collateral?

According to Ellison’s analysis, investing $3 billion would expose Alameda to significant risks, and if the lenders were to recall the loans, the company would essentially be unable to repay the debt.

Ellison claimed that even after reviewing her analysis, SBF still insisted on proceeding with the $3 billion investment. Shortly thereafter, Bankman-Fried announced in a tweet in January 2022 that FTX had launched a $2 billion risk fund, which was actually controlled by Alameda.

When asking Ellison for detailed information on various spreadsheets, the prosecution repeatedly asked her if her calculations already included FTX customer deposits.

She answered: yes. In fact, both Bankman-Fried and Ellison at the time naturally assumed that FTX customer deposits could be used to help Alameda.

Ellison stated that Alameda had been using FTX customer funds for years. She said that at a meeting in Hong Kong in 2021, SBF authorized the use of FTX customer deposits to repurchase approximately $2 billion worth of exchange stocks held by rival Binance.

Alameda paid for the acquisition of Robinhood shares

Ellison also mentioned that Bankman-Fried purchased over $600 million worth of shares in Robinhood Markets Inc. in May 2022.

She stated that these shares were paid for by Alameda, but when it was necessary to publicly disclose this purchase, Bankman-Fried requested that the ownership be transferred to another FTX entity because he did not want to be associated with Alameda. This acquisition once again demonstrates that SBF continues to be involved in Alameda’s business, despite claiming to have almost no relationship with the company.

Ellison emphasized that Bankman-Fried is the ultimate decision-maker of the FTX empire. He is fully aware that Alameda is taking funds from FTX customers and has almost unlimited credit limit in cryptocurrency exchanges. Despite publicly keeping a distance from Alameda and claiming not to manage the company, Ellison stated that Bankman-Fried guided her on how to handle the FTT tokens held by Alameda and its venture capital, as well as other important business decisions.

Alameda provided $5 billion in personal loans to SBF and other executives

Alameda’s borrowing continued to spiral upward in 2022, even increasing in ways that Ellison was not aware of. In May 2022, she learned that the company provided $5 billion in personal loans to SBF, FTX co-founder Gary Wang, and former engineering director Nishad Singh, which were used to fund venture capital and political donations. Ellison testified that SBF was “very interested” in politics and believed that a small amount of money could generate high returns in terms of political influence. He also mentioned wanting to exert political influence with his own money. SBF had once stated that there was a 5% chance he could become president.

As Alameda borrowed more money, SBF launched tokens such as FTT and Serum, providing approximately 60-70% of FTT tokens to Alameda for free. Ellison stated that SBF also instructed her to secretly buy FTT if it fell below $1 (which he believed had “psychological significance”) without discussing the purchases in front of employees. Ellison testified that with the receipt of FTT, Alameda was able to obtain regular loans from lenders like Genesis.

The prosecutor stated that Ellison’s testimony is expected to continue until tomorrow.

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