Caroline Ellison says Sam Bankman-Fried told her to commit fraud

Caroline Ellison said in her testimony that Sam Bankman-Fried, co-founder of FTX, had instructed her to embezzle funds from FTX’s clients.

“Sam directed me to commit these crimes,” Ellison said in court on Tuesday.

In her first public appearance since the companies collapsed, Ellison said that Bankman-Fried was initially the CEO and owner of Alameda, directing her to engage in illegal activities. She also revealed that Alameda had utilized several billion dollars from FTX customers for its investments and to settle debts.

The directive was to repay the companies that had extended loans to Alameda Research, the crypto trading company under Ellison’s leadership. This chain of events ultimately resulted in the downfall of FTX.

Ellison appeared on the witness stand moments after FTX co-founder Gary Wang had completed his testimony.

Ellison and Wang hold crucial roles as key witnesses in the government’s case against Bankman-Fried, who is facing allegations of organizing a fraudulent fund transfer scheme to Alameda. This scheme led to a substantial deficit and, ultimately, the bankruptcies of both entities.

During earlier questioning by Bankman-Fried’s legal team, Wang revealed loans exceeding $200 million from Alameda that were utilized by FTX for venture investments in the years 2021 and 2022. Additionally, he confirmed receiving $1 million to cover loan interest. Out of this amount, approximately $200,000 was used to purchase a residence on St. Kitts Island.

Initial reservations

After facing substantial losses in 2018, Alameda sought a way to recover, prompting Bankman-Fried to prioritize the acquisition of additional funds. It was during this critical period that Ellison started her journey at Alameda as a trader after being offered the position by Bankman-Fried.

Bankman-Fried instructed Alameda employees to secure loans under any available terms and introduced the digital token FTT. Ellison mentioned that Alameda had possessed 60 percent to 70 percent of the coin’s supply, incurring negligible production costs. As the market price surged from an initial 10 cents to $50, Alameda reaped billions.

Ellison then said that Bankman-Fried had instructed her to include those FTT billions on the balance sheet, enabling Alameda to borrow money. Despite initial reservations about the accuracy of this move, she proceeded as per Bankman-Fried’s persuasion.

Subsequently, Alameda adopted a similar approach to other cryptocurrencies. Ellison testified that Alameda had provided $5 billion in personal loans to insiders, some of which were risky due to their callable nature.

When Genesis, a lender, sought an updated Alameda balance sheet, Ellison testified that she, along with Bankman-Fried, FTX co-founder Gary Wang and former FTX Director of Engineering Nishad Singh, brainstormed methods to present a more favorable financial position, preventing Genesis from demanding additional funds.

Second testimony on Wednesday

Continuing her testimony on Wednesday, Ellison recounted events from June 2022, a period of turmoil in the crypto markets.

Some of Alameda’s lenders demanded repayment, and she acknowledged knowing that the only way to fulfill these obligations was to use funds from FTX customers.

Prosecutors asserted that Bankman-Fried had been the primary decision-maker and mastermind behind these schemes. On the other hand, Bankman-Fried’s defense argued that Ellison bore full responsibility and mismanaged the company.

In November 2022, Alameda and FTX experienced a rapid collapse following CoinDesk’s exposé on the closely intertwined operations of both firms and Alameda’s financial liabilities. A significant competitor of FTX announced its intent to divest holdings of the digital token that constituted a substantial part of Alameda’s balance sheet, resulting in a sharp devaluation.

Subsequently, customers initiated withdrawals from the FTX exchange. However, FTX couldn’t facilitate these withdrawals, partly due to the funds lent to Alameda. Then, withdrawals were suspended, and within a few days, both companies sought bankruptcy protection.