Caroline Ellison emerged from hours of questioning by Sam Bankman Fried’s lawyer with her story largely intact, as the defense struggled to shake her testimony that the FTX co-founder masterminded a multibillion-dollar fraud.
(Bloomberg) — Caroline Ellison emerged from hours of questioning by Sam Bankman Fried’s lawyer with her story largely intact, as the defense struggled to shake her testimony that the FTX co-founder masterminded a multibillion-dollar fraud.
Ellison, the government’s star witness against her former boss and boyfriend, appeared relaxed in the face of the high-stakes cross-examination during her third day on the stand in Bankman-Fried’s fraud trial in Manhattan federal court. Prosecutors claim the FTX co-founder orchestrated a scheme to funnel customer funds from the cryptocurrency exchange to Alameda Research, its affiliated hedge fund, where Ellison was chief executive officer.
Practically since FTX and Alameda filed for bankruptcy in November 2022, Bankman-Fried has been suggesting Ellison was to blame, heightening expectations for Thursday’s cross-examination. Anticipating her testimony, Bankman-Fried leaked her private messages to the media in an apparent effort to discredit her, getting his bail revoked for potential witness-tampering in the process.
But over the course of three hours, defense lawyer Mark Cohen only managed to score subtle points. He got Ellison to admit that Bankman-Fried didn’t oversee daily operations and that she herself was not a good manager. But Cohen didn’t elicit any bombshells that cast major doubt on the sprawling case prosecutors have built against Bankman-Fried.
“There are some nicks in the bark,” said Michael Weinstein, a white-collar defense lawyer not involved in the case. “But the defense is still chipping away at a big oak tree,” he added.
Responsibility
One of Bankman-Fried’s main arguments has been to claim Ellison was responsible for the amount of money Alameda borrowed from FTX, as well as failing to hedge the risk it created. Ellison agreed that there were times when Bankman-Fried did not participate in Alameda’s daily operations. Bankman-Fried founded Alameda and held a 90% interest in the fund.
“There were periods of time when he wasn’t paying attention to Alameda” or interacting with the firm’s executives, Ellison said in court. She had day-to-day responsibility for Alameda’s trading strategies, but “Sam gave the ultimate direction on what he thought we should do.”
Read More: FTX Latest: Ellison Laughed Nervously at Meeting Before FTX Fall
Ellison, 28, has pleaded guilty and agreed to cooperate with the government in the case against Bankman-Fried. Since Tuesday, she’s detailed how Bankman-Fried directed certain actions to conceal Alameda’s borrowing of customer funds, mainly for risky, illiquid investments. Efforts to hide the liability increased as the crypto markets stumbled in 2022. She said he asked her, at one point, to create alternative spreadsheets that would hide a multibillion-dollar hole in Alameda’s balance sheet.
Breakup
The defense successfully put some distance between Bankman-Fried and Alameda’s operation when they questioned Ellison about FTX customer deposits that were still wired directly into Alameda accounts after the exchange opened its own bank account. Ellison said she told prosecutors that “it seemed like he might not know” about those transfers.
Cohen suggested that Ellison’s romantic involvement with Bankman-Fried may have meant she didn’t communicate with him as often about conditions at Alameda. She acknowledged that their contact was affected by their spring 2022 breakup.
“I found it difficult to have in-person, one-on-one conversations,” Ellison said, “so I tried to avoid that and to avoid social situations with him.”
‘Ambition’
But she added that the two of them continued to have conversations over the messaging app Signal, including about Alameda.
The defense lawyer tried to draw a distinction between her personality and Bankman-Fried’s, suggesting she didn’t handle pressure as well, which may have affected her management of Alameda.
Ellison agreed that Bankman-Fried was more “driven” and “ambitious,” while she was often highly stressed and not effective as a manager. But she also said she felt that some of Bankman-Fried’s outlook rubbed off on her.
“I didn’t think of myself as ambitious before I started at Alameda, but I believe I became more ambitious,” she said.
Wrongdoing
As the cross-examination came to a close, Cohen focused on a November 2022 meeting with Alameda’s staff at which she came clean to them about the firm’s financial condition and told them it was likely to shut down.
“Were you admitting wrongdoing to the employees?” Cohen asked.
“Yes, I was,” Ellison said.
After Cohen finished his questioning, prosecutors also asked her about that meeting. Ellison said that, while Alameda employees seemed upset about wrongdoing but were grateful she had been open and honest with them.
Prosecutors have built their case by tapping into Bankman-Fried’s inner circle and reaching cooperation deals with some of his closest confidants. In addition to Ellison, Gary Wang, FTX co-founder and former chief technology officer, took the stand last week and testified that Bankman-Fried asked him to alter the exchange’s code to allow Alameda to borrow essentially unlimited amounts from FTX accounts. Nishad Singh, FTX’s former engineer chief, may also take the stand in the fraud trial. Wang and Singh have also pleaded guilty to fraud.
Read More: The Key Players at Sam Bankman-Fried’s Historic Fraud Trial
–With assistance from Allyson Versprille, Hannah Miller, Teresa Xie, Beth Williams and stacy-marie ishmael.
More stories like this are available on bloomberg.com
©2023 Bloomberg L.P.