In June 2022, amid the broader crypto meltdown, Caroline Ellison and FTX co-founder Sam Bankman-Fried were looking at a massive hole in Alameda Research’s balance sheet, a New York court heard on Wednesday.
FTX’s affiliated hedge fund had borrowed billions of dollars from the cryptocurrency exchange’s deposits. If FTX customers or potential lenders caught wind of it, Ms Ellison, Alameda’s chief executive, feared it would “all come crashing down”.
But Mr Bankman-Fried had a solution: create new balance sheets. Ms Ellison came up with seven, the court heard.
The alternative balance sheets were one of the ways Mr Bankman-Fried asked her to lie in his futile efforts to preserve his crypto empire, Ms Ellison said during her second day on the stand as the star witness in his fraud trial in Manhattan federal court.
Towards the end of her testimony, Ms Ellison fought back tears as she recalled her feelings when Alameda’s $14 billion debt to FTX finally doomed both companies.
“That was, overall, the worst week of my life,” Ellison testified Wednesday about the exchange’s November 2022 collapse.
Though she “felt indescribably bad about people who were harmed,” Ms Ellison said she was also relieved.
“I felt a sense of relief that I didn’t have to lie any more, that I could start taking responsibility for what I had done,” said Ms Ellison, who pleaded guilty to fraud and agreed to co-operate with prosecutors barely a month after FTX’s bankruptcy.
Wednesday’s testimony by Ms Ellison, who is also Mr Bankman-Fried’s ex-girlfriend, directly took on one of his main defence arguments: that she, not he, was in charge of Alameda when it borrowed billions from FTX. For months, Mr Bankman-Fried has suggested that Ms Ellison was primarily responsible for Alameda’s borrowing and that he only failed to supervise her.
“I mean, I absolutely could have, should have done things differently, and I could have hedged things earlier in the year,” Ms Ellison testified. “But Sam was the one who chose to make all these investments that put us in a leveraged position in the first place.”
She also cast in a new light Mr Bankman-Fried’s well-publicised adherence to the effective altruism movement, which encourages followers to make as much money as possible to use for the betterment of society.
During FTX’s better days, Mr Bankman-Fried was a well-known donor to the Democratic Party and other causes. Ms Ellison noted that he initially bought luxury cars but then switched to a Toyota Corolla, which he thought would be “better for his image”.
Ms Ellison, who followed effective altruism, testified Mr Bankman-Fried’s beliefs were such that even actions like lying and stealing could be justified in pursuit of the greater good. She said Mr Bankman-Fried’s outlook influenced her as well.
“When I started working at Alameda, I don’t think I would have believed if you told me I would be sending false balance sheets to our lenders or taking customer money, but over time it was something I felt more comfortable with,” Ms Ellison testified.
Mr Bankman-Fried’s lawyers could begin their cross-examination on Thursday.
Under questioning by Assistant US Attorney Danielle Sassoon, Ms Ellison detailed the growing sense of crisis permeating the crypto industry through the spring and summer of 2022, following the collapse of Terraform Labs’s stablecoin. Ms Ellison said Alameda had borrowed $13 billion from FTX by mid-June 2022.
“I was in a state of dread,” she said of that time. “I was kind of thinking and imagining every day about what might happen if people tried to withdraw too much money at one time.”
She said she imagined FTX customers, lenders and everyone Alameda worked with “would get hurt by this”.
It was in that context that Mr Bankman-Fried asked her to create false balance sheets for Alameda that would conceal the scale of Alameda’s exposure to FTX from lenders like Genesis.
“I understood him to be directing me to come up with ways to conceal things in our balance sheet we both agreed would look bad,” Ms Ellison said.
In August 2022, she said Mr Bankman-Fried started blaming her for the worsening situation.
“Sam started saying Alameda should have hedged way more earlier in the year, that was a big mistake, that was my fault, and I was largely responsible for the financial situation,” Ms Ellison testified. “I got upset. I started crying.”
She said that she probably did make mistakes but said Mr Bankman-Fried was more to blame for the mess they found themselves in.
In describing her growing concerns, Ms Ellison echoed earlier testimony by other prosecution witnesses, including FTX co-founder Gary Wang, who said Mr Bankman-Fried directed him to alter the exchange’s backend code so that Alameda could borrow unlimited amounts. Mr Wang also pleaded guilty and agreed to co-operate in December.
Mr Wang and Ms Ellison were often in the same group Signal chats with Mr Bankman-Fried and other FTX executives, she said. That continued into the autumn of 2022, by which time Ms Ellison said she and Mr Bankman-Fried were no longer a couple.
“We had broken up a few months prior, so I was trying to avoid spending much time with him in a social context and having one-on-one conversations with him,” she testified.