Caroline Ellison: Alameda Kept Using FTX Client Funds ‘Because Sam Told Me To’

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“I was in a constant state of dread,” the former Alameda CEO testified in the fraud trial of her former boss and paramour, Sam Bankman-Fried.

This is a developing story and will be updated frequently throughout the day.

NEW YORK — Sam Bankman-Fried told Caroline Ellison to continue repaying Alameda Research's lenders with FTX customers' money, which she did despite misgivings, she testified Wednesday.

It was the second day of testimony for Ellison, the former CEO of hedge fund Alameda Research and star witness in the government’s criminal fraud case against her former boss and paramour, FTX founder Bankman-Fried.

In May 2022, the Luna crypto token’s decline led to a broader market downturn which caused several of Alameda’s creditors to call back loans that they’d made to the Bankman-Fried-founded trading fund, Ellison testified.

“I was in a constant state of dread,” she said. “I knew we would have to take the money from our FTX line of credit and that was money that could be called in at any time.”

Asked why that money was particularly risky, Ellison said it “was coming from FTX customers” who could try to withdraw it at any time.

Ellison said she grew increasingly worried throughout the spring of 2022 that Alameda’s reliance on FTX customer funds could lead to catastrophe for both firms.

“I was concerned that if everyone would find out, then everything would come crashing down,” Ellison said.

In spite of her concerns, Ellison testified that she continued to pay back lenders via Alameda’s FTX line of credit – which meant using FTX customer funds – “because Sam told me to.”

Duping Genesis

Alameda had by mid-June 2022 borrowed 77% of the $13 billion of customer U.S. dollar deposits into FTX, according to an internal FTX spreadsheet introduced by prosecutors and authenticated by Ellison. Ellison said she asked FTX executives Gary Wang and Nishad Sing to gather the data for her when she grew concerned about the size of Alameda’s borrowings from FTX.

By this point in June, the data showed Alameda had borrowed 52% of all ETH deposits, 44% of USDT deposits and 25% of BTC deposits into FTX – as well as all of the Australian dollar and BRZ deposits into the exchange. (BRZ is an Ethereum token backed by Brazilian real.)

When Genesis, a major Alameda lender, asked Ellison if she could provide documentation of Alameda's financials, Ellison said she and Bankman-Fried worried that providing accurate financials would “show that Alameda was risky,” so the pair devised strategies to improve the look of Alameda’s financial position. (Genesis, now defunct, is a subsidiary of Digital Currency Group, which owns CoinDesk.)

At one point, said Ellison, Bankman-Fried suggested Alameda could “put employees’ personal SRM tokens on its balance sheet” and take other measures to inflate the firm's assets. SRM is a token on the Solana blockchain that Bankman-Fried had created and distributed, in part, to employees, according to earlier court testimony.

Ellison said that she and Bankman-Fried were still concerned that the new balance sheet they’d assembled would scare Genesis, so she went on to create “seven different, alternative balance sheets” for the pair to consider sending to the lender. Ellison walked through some of the balance sheets in court and detailed the different strategies she used in an attempt to hide Alameda’s risky financials.

At that time, around June 2022, Alameda Research got into trouble after a broader decline in the crypto market that summer led several of the hedge fund’s biggest lenders to recall their loans to Alameda, Ellison said.

According to text messages the prosecution showed the witnesses from June 2022, crypto lender Genesis had asked Alameda to pay back $500 million “in $250 million clips.” In addition to that, former crypto lending desk Celsius also asked for its loans to be repaid.

It was after Celsius’ request that Sam Bankman-Fried said he was considering selling shares of FTX to Bin Salman to raise more money to pay back Alameda’s lenders, Ellison said.

Moral 'framework'

The former Alameda CEO also recalled how Bankman-Fried had said that lying and stealing money were permissible in his worldview.

She recalled becoming more and more used to doing those things and sending false information to business partners or taking FTX customer money.

To avoid "legal trouble," Ellison used vague language in an internal FTX document detailing how much Alameda had taken from the now-bankrupt crypto exchange, she testified.

Prosecutors introduced as exhibits spreadsheets created by Ellison detailing Alameda's financial balances. The documents, according to Ellison, showed that Alameda had taken more $10 billion from customers of FTX by May 2022.

Asked why this money was labeled "FTX borrows," Ellison said she was following orders from Bankman-Fried. “I didn’t want to say explicitly 'FTX customer money,'" she said on Wednesday.

Bankman-Fried “told us not to put things in writing that might get us in legal trouble.”

Shortly after Ellison resumed her testimony, Judge Lewis Kaplan dealt the defense another blow when he largely denied multiple requests to let Bankman-Fried’s lawyers raise the lack of crypto-specific U.S regulations, likely recoveries from the FTX bankruptcy, and his charitable giving.

That crypto exchanges are not regulated like securities trading venues is “irrelevant,” and only likely to confuse the jury, Kaplan said, adding the defense had “misconstrued” his earlier rulings regarding allegedly unlawful political donations.

Ellison began her testimony on Tuesday, and opened by saying she committed crimes with Bankman-Fried by sending balance sheets that misstated Alameda's assets and liabilities to the crypto hedge fund's lenders and by taking FTX customer funds and using them to repay debts or for investments, to the tune of around $10 billion.

Things fell apart in November 2022, Ellison said, when asked Tuesday what happened when customers tried to withdraw their funds.

"Initially FTX was able to process some withdrawals, but pretty soon it started running out of money. Alameda tried to send more money to FTX, but there wasn't enough to cover all the customer claims," she said. This was "because Alameda had taken it to make our own investments and to repay our lenders."

Over the course of her first day of testimony, Ellison walked the jury through how Bankman-Fried, despite naming her (and for a spell, Sam Trabucco) as CEO of Alameda, still largely retained control over the firm's decisions, and how he disregarded her advice on issues like whether to expand FTX's investment portfolio.

Alameda's inability to sell large portions of the FTT token came up. Selling the token would have depressed the price enough to dramatically hurt Alameda's credit with lenders, she said.

"Bankman-Fried gave us a lot of instructions about FTT; at various points he instructed us to buy if there was a large amount of selling or if the price was going down too much," she said.

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