October 11, 2023 at 10:04 GMTModified date: October 11, 2023 at 10:04 GMT
October 11, 2023 at 10:04 GMT

Star witness Caroline Ellison takes a stand in SBF trial

Former CEO of Alameda Research, Caroline Ellison, testified in court on Tuesday, accusing SBF of directing her to commit fraud.

Star witness Caroline Ellison takes a stand in SBF trial

The court trial of the FTX founder has ventured into its second week featuring the highly-anticipated testimony from former CEO of Alameda Research and Sam Bankman-Fried’s (SBF) one-time girlfriend, Caroline Ellison.

Ellison spoke about how her company had been borrowing the customer funds of its sister company, crypto exchange FTX. Bankman-Fried had instructed her “to use FTX funds but to keep money on FTX” in order to meet customer withdrawal requests.

The star witness, who pleaded guilty to fraud and conspiracy charges last year, said on Tuesday that SBF had “directed” her to steal customer money. “He was the one who directed us to take customer money and repay our loans”, said Ellison to the jury.

Testifying that Alameda had taken several billion dollars from FTX to make its own investments, she said: “I sent balance sheets at the direction of Sam that made Alameda’s balances look less risky to investors.”

According to her, a lot of this money went to loans made to members of Bankman-Fried’s inner circle, with funds going towards “investments and political donations”. She also revealed how Bankman-Fried thought this political donation strategy was “highly effective”, offering “very high returns in terms of political influence” at a modest cost.

While Ellison said she “didn’t feel good about” the loan arrangements that made the trading firm “riskier”, it was always Bankman-Fried who was in charge. She testified that she was always deferred to him on big decisions even though she was the CEO of Alameda and despite the appearance that Bankman-Fried was stepping back from the hedge fund to focus on running his FTX exchange.

On her relationship with the FTX founder, Ellison said: “The whole time that we were dating, he was also my boss at work, which created some awkward situations.”

She also told the jury that she did not have any equity in Alameda despite asking for it as Bankman-Fried thought that it would be “too complicated and didn’t make sense” for her to get a stake in the hedge fund. Ellison also claimed that there was an “essentially unlimited” line of credit that Alameda had at FTX and it was SBF who “set up these systems”.

In one of the documents that Ellison had supplied from the fall of 2021, SBF had asked her to game out the consequences of a “10th percentile scenario” where crypto markets crashed 50 per cent and the exchange was shaken by bad publicity. During that time SBF was contemplating on making another $3bn in venture capital investments.

According to Ellison’s analysis, she warned him that investing the $3bn would put Alameda at extreme risk, making it essentially impossible for the company to pay up if lenders recalled loans. In her model, she assumed “Alameda would use FTX customer funds” to help repay its loans.

In response, Ellison said Bankman-Fried suggested changing these loans from open-term (which could be recalled at any time) to fixed-term.

Bankman-Fried then went ahead to create the venture fund, making Alameda’s position even more riskier, said Ellison. A year later, the FTX exchange sank, undermining Bankman-Fried’s earlier claim that he was unaware of the depth of Alameda’s financial distress as well as the scale of its borrowing from FTX until shortly before both companies collapsed.

Last week, the courtroom heard testimonies from a total of four people: FTX customer Marc-Antoine Julliard, former FTX developer Adam Yedidia, Paradigm co-founder Matt Huang and FTX co-founder Gary Wang.

The now-defunct crypto exchange FTX’s co-founder and former chief technology officer, Gary Wang also spoke in the court on Tuesday. Defence attorney Christian Everdell opened the day’s proceedings by continuing his cross-examination of Wang.

Wang revealed signing a number of promissory notes for loans worth tens of millions of dollars from Alameda. When asked by Judge Lewis Kaplan what the $35m in one loan was for, the executive replied saying that it was for a company Bankman-Fried wanted to invest in.

In his 6 October court testimony, Wang had disclosed that the exchange used a Python code to misrepresent the value of FTX’s insurance fund. The so-called “Backstop Fund” was designed to protect user losses in case of huge and sudden market movements. However, according to Wang, this figure was fabricated and never contained any of the exchanges’ FTX tokens.