Caroline Ellison, the star witness against FTX co-founder Sam Bankman-Fried, is due to take the stand at his fraud trial as soon as Tuesday. Her highly-anticipated testimony will be pivotal in the criminal case and is expected to delve into the inner workings of FTX and sister hedge fund Alameda Research.
(Bloomberg) — Caroline Ellison, the star witness against FTX co-founder Sam Bankman-Fried, is due to take the stand at his fraud trial as soon as Tuesday. Her highly-anticipated testimony will be pivotal in the criminal case and is expected to delve into the inner workings of FTX and sister hedge fund Alameda Research.
Ellison, the former Alameda chief executive officer, is one of the few people in Bankman-Fried’s inner circle whom prosecutors say knows the truth behind the alleged siphoning of billions of dollars in FTX customer funds to the sister trading firm. She pleaded guilty and agreed to cooperate with federal prosecutors after FTX collapsed.
Bankman-Fried, 31, is accused of orchestrating the yearslong fraud and spending lavishly on real estate, speculative investments and expanding his crypto empire. He has pleaded not guilty. Ellison could be called to the stand as soon as FTX co-founder Gary Wang finishes his testimony.
Read more: The Crypto Fraud Case Against Bankman-Fried and FTX: QuickTake
Ellison is likely to discuss a meeting with Alameda employees in November 2022, during which she admitted that her firm used customer funds to repay creditors and that Bankman-Fried authorized it. Prosecutors also have Ellison’s personal diaries which chronicle her serial breakups with Bankman-Fried and the difficulties she had in working with him.
So far the trial has focused on how much Bankman-Fried knew or didn’t know about the alleged misuse of customer funds. Here are some of the biggest takeaways from the first week of the trial.
Prosecution vs. Defense
The first week of Bankman-Fried’s trial in federal court in Manhattan offered critical insight into the strategies of the prosecution and defense in the weeks ahead.
Prosecutors emphasized allegations that Bankman-Fried knew he was committing fraud by stealing billions of dollars from customers to help fund a grand lifestyle full of luxury real estate purchases, celebrity hangouts and massive political donations.
“He had wealth, he had power, he had influence, but all of that was built on lies,” Assistant US Attorney Thane Rehn said.
The defense painted a very different picture of Bankman-Fried, arguing that he was a hard-working math nerd who simply got caught up in a crypto market crash that took down multiple startups.
“Sam didn’t intend to defraud anyone. There was no theft,” said Bankman-Fried’s attorney Mark Cohen. Cohen also pointed the finger at Ellison, saying she didn’t listen to Bankman-Fried when he suggested that she hedge Alameda’s risky crypto bets during the 2022 market turmoil.
SBF’s Friends and Colleagues
Two former FTX employees who knew Bankman-Fried from college, including his former roommate, both described Bankman-Fried as the ultimate decision-maker at FTX who tried to cover up the company’s financial failings.
One of them was Wang, FTX’s former chief technology officer, who knew Bankman-Fried from a high school math camp as well as their MIT fraternity. On the stand, he immediately admitted that the two of them committed a multi-billion dollar fraud.
Wang, who pleaded guilty as part of a cooperation deal with prosecutors, went into detail about how Bankman-Fried granted approval of the special privileges Alameda had on FTX, including the ability to withdraw customer funds as early as 2019, eventually giving it a $65 billion credit line. Bankman-Fried’s Nov. 7 tweet stating that FTX was fine was a lie, Wang said.
“FTX was not fine and assets were not fine,” Wang said.
Wang also testified that Bankman-Fried suggested shutting down Alameda Research in September, 2022, around the time a Bloomberg News story drew attention to the close relationship between FTX and Alameda. Around this time, however, Ellison disclosed Alameda had borrowed $14 billion from FTX and couldn’t afford to repay it, Wang testified.
Read Sam Bankman-Fried’s memo about shutting down Alameda Research in September 2022.
Adam Yedidia, an FTX developer who attended MIT with Bankman-Fried, testified last week that he and Bankman-Fried discussed an $8 billion shortfall at FTX because of loans to Alameda about five months before both companies imploded. Yedidia said Bankman-Fried seemed nervous when he brought it up.
“Sam said said something like, ‘We were bullet proof last year. We’re not bullet proof this year,’” Yedidia said.
The Scene in Court
The trial attracted intense media and industry interest, with journalists, bloggers and commentators lining up at the courthouse from the early morning to nab a spot in the courtroom. Even Martin Shkreli, better known as Pharma Bro, who spent almost seven years in prison for securities fraud was spotted at the courthouse and offered his analysis on social media.
Southern District of New York US Attorney Damian Williams, whose office has a long history of prosecuting high-profile white collar cases, and his top brass also dropped by the courtroom to watch opening statements.
Bankman-Fried’s parents, Stanford Law professors Barbara Fried and Joe Bankman have been in the court most days, feverishly taking notes on a shared legal notepad and often conferring with their son’s lawyers during breaks. His parents were referenced by the prosecution during opening statements, alleging Bankman-Fried used customer funds to buy a beachside apartment for them in the Bahamas.
Frustrations rose between Judge Lewis A. Kaplan and Bankman-Fried’s defense team, with the judge scolding attorney Christian Everdell for asking witnesses questions that the jury had already heard.
“We have been up and down that mountain a couple of times,” Kaplan said at one point during Yedidia’s cross examination. Kaplan sustained dozens of objections raised by the prosecutors, some even before they had a chance to stand up and explain what they were objecting to.
The trial is expected to last more than a month. The jury may hear from several more witnesses, including Nishad Singh, who served as head of engineering at FTX and was a friend of Bankman-Fried’s younger brother. He also pleaded guilty and agreed to cooperate with prosecutors. Wang already pointed to Singh as the co-author of special software code that allowed Alameda to have a negative balance on FTX without having its account closed and liquidated, a privilege no other customer had.
Other potential witnesses of interest include Sam Trabucco, Bankman-Fried’s friend from math camp and MIT, who served as Alameda’s co-CEO until August 2022; Xiaoyun “Lily” Zhang, who reportedly dated Bankman-Fried when they worked at the trading firm Jane Street. Her firm Modulo Capital was also based in the Bahamas and received $475 million from Alameda.
(Updates with SBF memo in paragraph 14.)
More stories like this are available on bloomberg.com
©2023 Bloomberg L.P.