Sam Bankman-Fried’s fraud trial entered its sixth day on Wednesday with more testimony from Caroline Ellison, his ex-girlfriend and the former CEO of the hedge fund associated with his collapsed cryptocurrency exchange. She testified that, during last year’s cryptocurrency crash, Bankman-Fried directed her to illegally appropriate FTX customers’ money.
When downturn began in May 2022, Ellison worried that the walls could soon come down on Alameda Research. Many of the hedge fund’s lenders had open-term loans, which meant they could call them – and ask for their money back – at any point. The crash left Alameda in the lurch after the value of its crypto assets evaporated. The two had broken up in early 2022. Ellison said she was avoiding social settings and one-on-one conversations with him when the crash began.
Lenders started to call loans in June. Alameda was obligated to repay them immediately. It was billions of dollars short, Ellison said.
Ellison said she and Bankman-Fried had an in-person conversation in their apartment’s study about Alameda’s precarious state in August 2022. He told her that Alameda should have hedged its financial positions earlier in the year and to a greater degree. He was speaking “loudly and strongly” to her, and when she started crying, she had trouble continuing the conversation, she said.
“Sam started saying … it was a big mistake, and that it was my fault, and that I was largely responsible for the financial situation Alameda found itself in,” Ellison said. She added that she wished she had managed Alameda differently.
“In order to repay all of our loans, we’d have to use money using our FTX line of credit … that would be coming from customer funds,” she said. She repeatedly said that Bankman-Fried had set up a system to shuttle FTX customer funds to Alameda to cover loan expenses and make investments, all without notifying FTX customers, in her testimony the day before.
The prosecution asked Ellison what she thought about using customer money.
“I thought it was wrong,” Ellison said.
“Who decided to use FTX customer funds to repay lenders?” the lawyer asked.
“It was Sam’s decision,” Ellison said.
Bankman-Fried knew Alameda didn’t have the money to pay back these lenders, Ellison testified Wednesday. He told her to use FTX’s money, she said.
“He continued to direct me to repay the loans,” Ellison replied. Responding to another question shortly after, she said, “I understood that he was telling me to borrow money from our FTX line of credit … I understood that he was telling me to use FTX customer funds to repay our loans.”
Federal prosecutor Danielle Sassoon also asked Ellison about Bankman-Fried’s philosophy on rules. According to Ellison, “He said that he was a utilitarian and he believed that the ways that people try to justify rules like ‘don’t lie,’ ‘don’t steal,’ under utilitarianism didn’t work.”
This viewpoint began to affect her own, she said.
“It made me more willing to do things like lie and steal over time,” Ellison said. When she started working at Alameda, she wouldn’t have believed it if people had told her that she’d lie on balance sheets and steal from customers, she testified.
At one point Ellison also said that she didn’t put everything in the Google Docs that the company normally used to communicate:“Sam always directed us to be careful about putting stuff in writing and not putting stuff in writing that could get us in trouble,” she said.
The jury was shown a to-do list that Ellison made for herself. The list said that the No 1 priority was hedging.
On another Google Doc Ellison made, the header was “Things Sam is freaking out about”. The first item was hedging. The second was “bad PR in the next 6 months”.
She prepared various documents showing Alameda’s financials. Around the time that loans were being recalled, as Alameda was getting a cash injection from FTX, the hedge fund owed FTX around $10bn. Sassoon asked Ellison about her mental state at the prospect of repaying loans with money she didn’t have.
“I was in sort of constant state of dread. At that point, I knew we’d have to take the money from our FTX line of credit,” Ellison said. “Every day I was worrying about the possibility of customer withdrawals from FTX and the possibility of this getting out.”
Ellison testified on Tuesday that she was enmeshed in criminal activity while at the helm of Alameda. Bankman-Fried faces seven fraud and conspiracy counts for allegedly cheating customers out of $10bn. He has pleaded not guilty.
“While you were working at Alameda, did you commit any crimes?” Sassoon asked on Tuesday.
“Yes, we did,” she said. “[Bankman-Fried] directed me to commit these crimes.”
Ellison and Bankman-Fried wound up in a romantic entanglement that lasted years. She said that in 2018, she and the FTX founder “started sleeping together on and off”. Then, she said, “in the summer of 2020, we eventually started a romantic relationship”. They split in the summer of 2021 and got back together that fall. They broke up again in the spring of 2022.
“The whole time that we were dating he was also my boss at work, which created some awkward situations,” Ellison testified when asked about the dynamic. “There was a general theme that I sort of wanted more from our relationship … I sort of felt like he was distant or not paying attention to me.”
The two kept their relationship secret during their first go-round, then disclosed that they were living together during the second. The two resided in a $40m Bahamas penthouse with other FTX executives.
Ellison pleaded guilty to wire fraud and conspiracy charges in December 2022 for her role in the stunning collapse of FTX and Alameda.
