Caroline Ellison’s court testimony has been unsealed. This follows her prior guilty plea to seven fraud-related charges.
Caroline Ellison has revealed massive fraud at FTX and Alameda Research. In her testimony, she reveals that FTX misused and comingled customer funds. Alameda Research was a knowing accomplice in this. FTX improperly “loaned” customer funds to Alameda. Alameda “loaned” money to FTX executives. FTX was further exempt from fundamental risk management protocols and prepared misleading books for investors and lenders.
Caroline Ellison’s testimony confirms John J Ray III’s assertion that FTX is worse than Enron. Given the magnitude of the admitted fraud, it is no surprise that both Caroline Ellison and Gary Wang entered early guilty pleas. This does not bode well for Sam Bankman-Fried, however.
The admissions confirm much of what we already suspected, and they reveal massive fraud and incompetence. They also bode poorly for Sam Bankman-Fried’s future trial. Here are some highlights (lowlights?).
On Borrowings and use of customer funds
Caroline Ellison admitted that Alameda Research and FTX violated core risk management protocols and misused customers’ funds. This includes giving Alameda a backdoor exemption to collateral requirements or margin calls
“From 2019 to 2022, I was aware that Alameda was provided access to a borrowing facility on FTX.com, the cryptocurrency exchange run by Mr. Bankman-Fried. I understood that executives had implemented special settings on Alameda’s FTX.com account that permitted Alameda to maintain negative balances in fiat currencies and cryptocurrencies,”
“In practical terms, this arrangement permitted Alameda access to an unlimited line of credit without being required to post collateral, without having to pay interest on negative balances, and without being subject to margin calls or FTX.com’s liquidation protocols,”
Caroline Ellison further confirmed that FTX “loaned” customer funds to Alameda Research. This should never have happened. Some customers had not agreed to lend their money. Others, had accepted margin trading terms. However, this implies ‘standard’ use of their funds subject to the ordinary limits of a margin platform. It does not imply that they accept their money being funneled into a loss making enterprise that is exempt from ordinary risk management.
“I also understood that Alameda had financed the investments with short-term and open-term loans worth several billion dollars from external lenders in the cryptocurrency industry. In or around June 2022, I agreed to borrow several billion dollars from FTX to repay those loans. I understood that FTX would need to use customer funds to finance its loans to Alameda.”
What did they do with the money
The situation becomes even worse. Alameda “loaned” money to FTX executives. Being Alameda CEO, Caroline Ellison was implicitly complicit in this. It is not clear whether these were on commercial terms or if Alameda ever expected repayment. This looks likely directing customer funds to FTX executives’ pockets.
“While I was co-CEO and then CEO, I understood that Alameda had numerous large illiquid investments and had lent a lot of money to Mr. Bankman-Fried and other FTX executives,”
Concealing the wrongdoing
The wrongdoing gets worse. Sometimes the coverup is as bad as the crime. Here, Caroline Ellison admitted that FTX doctored financial statements to conceal related party loans. In so doing, Alameda – and implicitly FTX – misled lenders and investors.
"We prepared certain quarterly balance sheets that concealed the extent of Alameda's borrowing and the billions of dollars in loans that Alameda had made to FTX executives and to related parties,"
Is Caroline Ellison sorry?
The question is then whether Caroline Ellison is sorry. She has said that she is sorry and has admitted guilt. But, this notably came after Alameda and FTX collapsed. And, it does not appear that she helped to prevent the wrongdoing beforehand. This suggests the remorse might more be that she was caught more than that she erred.
“I am truly sorry for what I did”
“I knew that it was wrong. I want to apologize for my actions to the affected customers of FTX, lenders to Alameda, and investors in FTX. Since FTX and Alameda collapsed in November 2022, I have worked hard to assist with the recovery of assets for the benefit of customers and to cooperate with the government’s investigation. I am here today to accept my responsibility for my actions by pleading guilty.”
Does not bode well for SBF
The situation does not bode well for SBF. Both Caroline Ellison and Gary Wang have admitted to fraud related charges. They have agreed to cooperate with prosecutors. Their testimony appears damaging.
SBF’s defences will be interesting. Perhaps at this point he will attempt to claim that Caroline Ellison, Gary Wang, or other executives were the true masterminds and that he was merely an incompetent CEO whose employees defrauded him and the customers. It is not clear this defence would succeed.
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