When Sam Bankman-Fried’s defense lawyer Mark Cohen delivered his opening arguments at the FTX founder’s fraud trial on Oct. 3, he attempted to redirect the blame for the disappearance of over $8 billion in customer funds away from his client and toward Caroline Ellison. When she took the stand a week later, Ellison, who was the CEO of Bankman-Fried’s hedge fund, Alameda Research, and his on-and-off girlfriend, laid the blame squarely on him.
Bankman-Fried’s lawyers have suggested that FTX and Alameda combusted partially due to Ellison’s leadership failures and her refusal to mitigate risk, despite warnings from Bankman-Fried. “He relied on her and he trusted her,” Cohen said. Ellison’s trading mistakes, Cohen claimed, became “an issue later on, when the storm hit.”
Ellison, the prosecution’s star witness, responded forcefully on the stand, alleging that it was the other way around: that she was the one to caution Bankman-Fried about his risky financial practices, but that he ignored her advice and instead spent $3 billion more of Alameda’s money, increasing their reliance on customer funds.
Ellison has pleaded guilty to fraud and conspiracy, and is widely considered to be the star witness for the prosecution. “He directed me to commit these crimes,” she said while on the stand, facing Bankman-Fried. Her testimony, combined with evidence presented by the prosecution, contradictsBankman-Fried’s defense argument: that he borrowed his customer funds in good faith and was undone by forces outside of his control, like Ellison’s alleged incompetence.
Ellison and Bankman-Fried met when they were traders at the trading firm Jane Street Capital. Later, in March 2018, Bankman-Fried hired Ellison to trade cryptocurrencies for Alameda Research, the trading firm he had co-founded in 2017. She said in court that the pair started “sleeping together,” several months later. This kicked off a tumultuous on-and-off relationship that Bankman-Fried preferred to keep secret, Ellison said. In October 2021, a month before Ellison says they got back together again, Bankman-Fried appointed Ellison as co-CEO of Alameda Research.
“I felt like it was a big job, and I wasn’t very experienced,” Ellison says of the position. “I would always ultimately defer to Sam if he thought that we should do something.”
The pair ultimately ended up living together in a penthouse apartment—along with many other FTX colleagues—in the Bahamas, where the crypto exchange was headquartered.
Alameda Research and the FTX cryptocurrency exchange, which was founded in 2019, were supposed to be distinct entities. But Ellison says that Alameda used FTX as a piggy bank from the crypto exchange’s inception, at Bankman-Fried’s direction. “He said that FTX would be a good source of capital, and he set up the system that allowed Alameda to borrow from FTX,” she said.
Over time, “$10 to 20 billion” of FTX customer funds would be moved to Alameda, Ellison said. She said that some of those funds were then used to repay loans, cover expenses and make other investments.
The crux of Ellison’s testimony on Tuesday came when the prosecutors presented to the jurors a spreadsheet of Alameda’s finances from the fall of 2021. Ellison says she had created the spreadsheet at the behest of Bankman-Fried, who was trying to decide whether to put $3 billion more into venture capital investments.
When Ellison combed through Alameda’s books, she found that while the company was earning billions of dollars, it arguably owed even more to lenders, including the major crypto lender Genesis. Alameda, she wrote in the spreadsheet, had a negative asset value of $2.7 billion, excluding their holdings of highly volatile cryptocurrencies like FTT that were unlikely to fetch much actual money if sold on the open market. This made the company very vulnerable if the larger overall crypto market were to suddenly crash.
Ellison said in court that she shared the document with Bankman-Fried, and told him that making $3 billion more in venture investments “would put Alameda in a significantly riskier position and make it much less likely or almost impossible that we would be able to pay off our loans if all of our loans were called at once.”
But Bankman-Fried went ahead and created the FTX Ventures Fund, which started with $2 billion.
The prosecutors then proceeded to show a follow-up document from May 2022, in which Ellison once again warned Bankman-Fried of how precarious Alameda and FTX’s financial situation would be in the event of the crypto crash. The document shows Bankman-Fried himself acknowledging her prediction: “Yup, and could also get worse,” he commented on the Google Document.
This comment from Bankman-Fried seems to fly in the face of a crucial part of his defense’s argument: that he was blindsided by swift market forces and unable to respond to them due to Ellison’s leadership at Alameda. Instead, the evidence seems to suggest that Ellison warned Bankman-Fried about the high risk of his business decisions, that he acknowledged the risk to customer funds, and that he decided to imperil them anyway.
Ellison made other claims that suggested that Bankman-Fried did not act in accordance with his public declarations. She said that Bankman-Fried used market manipulation tactics to maintain the price of FTT—a cryptocurrency he had created—so that he could use it as collateral for loans, but would get upset if she talked about FTT trading “too openly” in the office. She said that Bankman-Fried oversaw the use of FTX customer deposits to buy back about $2 billion worth of FTX shares owned by their rival crypto exchange Binance, but did not disclose that information.
Ellison also added some personal details about Bankman-Fried, including his political ambitions: “He thought there was a 5% chance he would become president some day,” Ellison said.
Ellison returns to the stand on Wednesday, Oct. 11.