Caroline Ellison, the head of a digital currency hedge fund linked to Sam Bankman-Fried’s FTX, continued her testimony Wednesday in a criminal trial.
Allison is also Bankman-Fried’s ex-girlfriend and is considered the star witness in the prosecution’s case. Bankman-Fried faces seven federal charges, including wire fraud, securities fraud and money laundering, related to his oversight of now-defunct FTX and Alameda Research, both of which filed for bankruptcy last year.
He has pleaded not guilty to all charges. His defense attorneys began cross-examining Allison late Wednesday afternoon and will continue to do so Thursday.
In less than a year, Bankman-Fried, 31, went from being a cryptocurrency mogul and emerging global player with a net worth estimated at $16 billion to being a defendant , while his closest associates are testifying against him for decades together in a case that could land him in prison.
Allison is a central figure. On Tuesday, she testified that Bankman-Fried told her to steal about $10 billion from FTX clients and use it to repay companies that lent money to Alameda Research, the cryptocurrency trading firm she led.
“Sam directed me to commit these crimes,” Allison said in court Tuesday after telling prosecutors that she, Bankman-Fried and others committed the fraud.
She also said Bankman-Fried set up a system that allowed her to move the money.
Allison started working as a trader in Alameda in 2018. She testified that Bankman-Fried made it a priority to get more money after the hedge fund suffered huge losses that year. To that end, he told Alameda employees to get loans on any terms.
This is risky because the lender can call in these loans at any time. Allison said the loans would be enough to bankrupt Alameda if they were fully due and paid immediately.
She said Bankman-Fried is also trying to strengthen the company by creating the digital token FTT. Alameda holds 60-70% of the token’s supply, she said, and the manufacturing costs are essentially zero. Over time, as its market price rose from its original 10 cents to $50, Alameda’s book value reached billions of dollars.
Ellison is testifying under an agreement with the government after pleading guilty to a series of fraud charges and conspiracy to commit money laundering. FTX co-founder Gary Wang also testified against Bankman-Fried this week after pleading guilty to fraud charges. Both men hope to eventually have their sentences commuted.
Former FTX technical head Nishad Singh also pleaded guilty to fraud charges related to the FTX and Alameda implosion.
‘A constant state of fear’
In 2021, Allison became co-CEO and later sole CEO of Alameda. However, prosecutors said Bankman-Fried was the one who called the shots. Bankman-Fried’s attorneys argued that Allison bore full responsibility for mismanaging the company, including failing to make protective hedging transactions that would have reduced the risk of huge losses.
Allison testified that Bankman-Fried told her to put the growing value of FTT tokens on Alameda’s balance sheet so it could borrow money. She said she felt it was misleading, but he convinced her to continue.
Alameda later did the same with other coins, which gained great value as a result of Bankman Freed’s involvement.
As testimony continued on Wednesday, Ellison told prosecutors about events in June 2022, when several cryptocurrency companies and exchanges collapsed and investors went bankrupt en masse About $1 trillion was withdrawn from the market.
Some lenders in Alameda are demanding repayment, just as she feared. Allison testified that the only way she knew to repay her debt was to take money from FTX clients.
She said Bankman-Fried told her to do so and that he knew the money was secretly taken from those customers.
Allison told the court that when a major lender, financial services company Genesis, asked to see an updated Alameda balance sheet, she, Bankman-Fried, Wang and Singh brainstormed ways to make the company’s financial health appear More powerful so that Genesis doesn’t ask for it. Come back for more money.
She said they prepared various different balance sheets to show Genesis and prove she was “in a constant state of fear” at the time. The balance sheet chosen by Bankman-Fried concealed the fact that Alameda took approximately $10 billion from FTX users.
By October, Alameda had taken $14 billion to $15 billion from FTX users, and Bankman-Fried was trying to raise capital to fill the gap, she said.
Things fell apart in early November after a doctored balance sheet was leaked to Coindesk. While the filing made things look better for Alameda than they actually were, it also worried investors as they saw that the majority of the company’s balance sheet was comprised of FTT tokens.
Rival exchange Binance soon announced that it would be selling off its FTT holdings, which caused the price to plummet and made Alameda’s situation even worse.
The company managed to briefly shore it up with more client assets, but it soon failed.
Allison told the court that Bankman-Fried warned her and others to be careful about how they communicated with each other and set private chats to automatically delete, but she turned off the feature days after the news broke.
Bankman-Fried was relieved when the government showed the jury what she told Bankman-Fried.
“I guess I was just getting more and more scared of this day, it’s been something that’s been bothering me for a long time and now that it’s actually happening it feels great to have it end one way or another,” she wrote.
Allison cried after the messages were shared in court.
There was a brief reprieve when Binance agreed to acquire FTX, but the deal eventually fell apart. Two days later, FTX and Alameda sought bankruptcy protection.
Weeks later, criminal charges were filed against Bankman-Fried, Allison, Wang and Singer.
Bankman-Fried faces a separate trial in March 2024 on other charges, including bribing foreign officials. Ellison testified that Alameda paid large bribes to Chinese officials to unfreeze about $1 billion in funds from Chinese cryptocurrency exchanges.
Bankman-Fried has also pleaded not guilty to the charges.
