MANHATTAN (CN) — Sam Bankman-Fried, the 31-year-old former billionaire cryptocurrency mogul, directed his business partners to plunder as much as $14 billion of customers deposits on his online finance platform to pay off the debts of his hedge fund, Bankman-Fried's off-and-on girlfriend testified on the witness stand Tuesday afternoon.
Caroline Ellison, who was the CEO of the Alameda Research cryptocurrency-trading hedge fund founded by Bankman-Fried, answered questions at trial Tuesday as part of a cooperation deal with federal prosecutors reached one month after Bankman-Fried’s FTX cryptocurrency exchange filed for bankruptcy following the crypto equivalent of a bank run of customer withdrawals in November 2022.
Prosecutors have accused Bankman-Fried of fraudulently gambling in his own casino by directing his own hedge fund to commingle FTX customers' funds as loans for cryptocurrency futures trading on the exchange he co-founded and controlled.
Wearing a burnt pink dress and slate gray jacket on Tuesday morning, Ellison’s arrival at the Manhattan federal courthouse marked her first public appearance in the case since pleading guilty to seven criminal counts from a superseding indictment in secret last December.
Ellison scanned the courtroom for several beats before eventually identifying Bankman-Fried at the defense table.
"He directed me to commit these crimes," she said.
Early in her direct questioning, she acknowledged committing counts of "fraud, conspiracies to commit fraud and money laundering."
“They were committed with Sam," she testified.
The two “dated for a couple years” after meeting at the prestigious Jane Street Capital quantitative trading firm, Ellison said.
Assistant U.S. Attorney Danielle Sassoon asked Ellison what Bankman-Fried’s involvement was in defrauding FTX’s customers and Alameda’s lenders.
“He was originally the CEO of Alameda and then he the owner of Alameda and then he directed me to commit these crimes,” Ellison replied.
“We had access to essentially an unlimited line of credit at FTX and we received FTX customer funds directly into our bank accounts as part of the FTX fiat deposit system,” she continued. “He was the one that set up the system that allowed Alameda to take the money, and he was the one who directed us to take customer money to repay our loans.”
Sassoon then asked, “Around how much of FTX customer funds did Alameda use to repay lenders,” to which Ellison responded: “In the ballpark of $10 billion."
Ellison explained that they had defrauded Alameda’s lenders by sending out balance sheets “at the direction of Sam,” which incorrectly stated the hedge fund’s balances and assets and incorrectly made the company’s look less risky than it actually was.
Describing their off-and-on relationship, which began during the Covid-19 lockdown summer of 2020, Ellison said: "The whole time that we were dating he was also my boss at work, which created some awkward situations. 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."
During one of the couple's breaks in 2021, Bankman-Fried promoted her to co-CEO of Alameda, but kept her $200,000 annual salary unchanged, Ellison said.
At the time of her executive appointment, Bankman-Fried "thought was important to separate FTX and Alameda more optically," Ellison testified, in response to concerns from customers that two companies for were too closely engaged.
They later resumed dating again in November 2021, and Sam agreed to "make it public", rather than hiding the relationship as they had previously done.
Bankman-Fried never gave her any equity stake in Alameda despite her requests, she testified. She did however receive bonuses twice a year, she said, ranging from $100,000 at the beginning of her employment at Alameda, up to $20 million.
Ellison's cooperation with their investigation of Bankman-Fried could earn her a letter from prosecutors recommending a reduced sentence on the counts she pleaded guilty to in December 2022.
Bankman-Fried faces decades in prison if convicted on federal fraud and conspiracy charges in connection with withdrawing billions of dollars cryptocurrency exchange customers’ deposited funds to use for his hedge fund’s risky trades.
His defense lawyers have maintained a good faith defense against the federal charges and leveled blame at Ellison for Alameda’s massive debts by failing to hedge risky investments to protect the company during the collapse of the 2020–2022 cryptocurrency bubble, as purportedly urged by Bankman-Fried to do.
FTX co-founder Gary Wang, who also pleaded guilty in December 2022 as part of a cooperation deal with prosecutors, testified last week that Bankman-Fried had directed FTX to give Alameda a $65 billion line of credit and grant the hedge fund unique privileges in the platform’s coding to be allowed to keep trading cryptocurrency assets with a negative account balance.
Wang testified that Banman-Fried was aware FTX did not have enough assets to satisfy its customers withdrawals due to an $8 billion shortfall when he tweeted reassurances that "FTX is fine. Assets are fine," in a since-deleted post.
Prior to the bankruptcy and collapse of FTX, Bankman-Fried had been lauded as one of the most prominent evangelists of the philanthropic social philosophy known as “effective altruism,” which believes in prioritizing donations to fund projects that will have the largest impact on the greatest number of people.
He has pleaded not guilty. The trial is expected to last up to six weeks.
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