NEW YORK, (Reuters) – Caroline Ellison, the former chief executive officer of Sam Bankman-Fried’s hedge fund, testified yesterday that the former crypto mogul directed her and others to defraud customers of his FTX exchange by taking their money without their knowledge.
Ellison, who said she previously dated Bankman-Fried, depicted her former boss as an ambitious young man who had no qualms about sharing misleading financial information with lenders, grew preoccupied with a rivalry with the Binance crypto exchange, and thought he could one day become U.S. president.
Ellison said the hedge fund, Alameda Research, took about $10 billion in FTX customer funds to repay its debts and make investments. The fund gained the money through a $65 billion line of credit it had on the exchange, and from funds FTX customers deposited into an Alameda bank account when FTX lacked its own account.
“He was the one who set up these systems that allowed Alameda to take the money and he was the one who directed us to take customer money to repay our loans,” Ellison said during nearly three hours of testimony. She is expected to return to the witness stand on Wednesday.
The testimony by Ellison, 28, was keenly awaited. She is one of three ex-members of the 31-year-old former billionaire’s inner circle who have pleaded guilty to fraud charges and agreed to cooperate with the Manhattan U.S. Attorney’s office.
Prosecutors say Bankman-Fried plundered billions in customer funds to prop up Alameda, buy real estate and donate more than $100 million to U.S. political campaigns before FTX declared bankruptcy in November 2022 following a collapse that shocked financial markets and left his reputation in tatters.
Bankman-Fried has pleaded not guilty to two counts of fraud and five counts of conspiracy, and has argued that while he made mistakes running FTX, he never intended to steal funds.
In his opening statement last week, defense lawyer Mark Cohen told jurors to question whether cooperating witnesses like Ellison were putting a new, nefarious spin on old decisions by Bankman-Fried which they had originally agreed with.
Gary Wang, FTX’s former technology chief, testified that Bankman-Fried falsely tweeted that FTX was “fine” in November as the exchange faced surging demand for withdrawals. A third cooperating witness, former FTX engineering chief Nishad Singh, is also expected to testify at the trial, which could last up to six weeks.
Ellison said Alameda first used its FTX line of credit in the summer of 2021, when Bankman-Fried wanted to buy back an equity stake held by rival exchange Binance in FTX. Bankman-Fried had grown concerned that “Binance would do things to mess with FTX,” Ellison said.
She said she informed Bankman-Fried in a conversation at their offices in Hong Kong, where both FTX and Alameda were based at the time, that Alameda would have to borrow from FTX to buy back the $2 billion stake.
“He said, ‘That’s OK, I think this is really important, we have to get it done,’” Ellison said, as prosecutors displayed a picture of Bankman-Fried with Binance CEO Changpeng Zhao.
She said Bankman-Fried ultimately used $1 billion in FTX customer funds to buy back the stake.
“It was Sam’s decision,” Ellison said.
Binance did not immediately respond to a request for comment. Bankman-Fried said Binance offered to take over FTX as it was collapsing in November 2022, but later backed out of the deal.
The U.S. Securities and Exchange Commission has sued Binance and Zhao, alleging that they commingled and diverted customer funds. Binance and Zhao have denied the allegations.
Ellison testified that she met Bankman-Fried while both were working at Jane Street, a Wall Street trading firm. Bankman-Fried left in 2017 to found Alameda, and Ellison followed when he offered her a job as a trader.
“He was very ambitious,” Ellison told the court.
She said Bankman-Fried viewed political donations as a relatively inexpensive way to amass power, and even believed there was a 5% chance he could become president himself.
“He said he thought it was very effective that you could get very high returns in terms of influence by spending relatively small amounts of money,” she said, adding that he had donated $10 million to U.S. President Joe Biden’s campaign.
In July, the New York Times published a story citing Ellison’s private writings from before FTX’s collapse in which she described feeling overwhelmed at work and hurt by a breakup with Bankman-Fried. After defense lawyers acknowledged that Bankman-Fried had shared the writings with a Times reporter, U.S. District Judge Lewis Kaplan revoked his $250 million bail and sent him to jail for probable witness-tampering.
