Comment on this story
comment
For four years, Caroline Ellison and Sam Bankman-Fried worked together to build a crypto empire. Ellison ran the hedge fund affiliated with FTX, the cryptocurrency exchange Bankman-Fried founded in 2019.
Aside from work, the two had a lot in common: both were children of accomplished academics, studied mathematics at prestigious universities and raised awareness of the importance of giving money away to make the world a better place. Both also lived with colleagues in a luxury penthouse in the Bahamas and are said to have been romantically involved at times.
Now, however, Ellison has split from Bankman-Fried in a big way: She is cooperating with federal prosecutors who are accusing him of orchestrating one of the largest financial frauds in US history.
Last month, 28-year-old Ellison pleaded guilty to charges that she, Bankman-Fried and other FTX executives conspired to steal their clients’ money to invest in other companies, make political donations and buy expensive real estate – Charges carry a maximum penalty of 110 years in prison. On a December 19th Ellison apologized to FTX’s clients and investors, saying she knew what she did was wrong.
Bankman-Fried, 30, is next due in court on January 3 when he is likely to plead not guilty, according to a person familiar with the matter, who spoke on condition of anonymity to discuss private information. In numerous interviews prior to his December 12 arrest, he insisted that he was only guilty of poor management and that he had not knowingly defrauded anyone.
Former FTX chief technology officer Gary Wang, 29, also pleaded guilty. Ellison and Wang’s attorneys did not respond to requests for comment. Mark Botnick, a spokesman for Bankman-Fried, declined to comment.
Ellison’s settlement with the government could be bad news for Bankman-Fried. The fact that she and Wang quickly pleaded guilty and signed the covenants indicates they will testify against Bankman-Fried in court, said Neama Rahmani, a Los Angeles-based trial attorney and former federal prosecutor. “They are fully cooperating,” he said.
If Ellison provides significant assistance to prosecutors, the government will ask the judge to consider that when she is eventually convicted. Defendants often agree to testify against their alleged co-conspirators in order to reduce their own sentences. If Ellison helps the government, Rahmani estimates her sentence could be as short as five years, compared to Bankman-Fried’s more likely 10 to 20 years, he said.
Post Reports Podcast: The Fall of FTX
Ellison’s rise to become one of the most important figures in the crypto world has been rapid. In a July 2020 interview on FTX’s internal podcast, she detailed her childhood, education, and brief tour of Wall Street before ending up at Alameda Research, Bankman-Fried’s hedge fund that was closely integrated with FTX.
While Bankman-Fried’s parents are law professors at Stanford, Ellison’s mother and father are economics professors at the Massachusetts Institute of Technology. Her father, who wrote math textbooks for children, introduced her to mathematics from an early age. She also read a lot, tackling a lengthy Harry Potter book when she was just 5 years old because she was too impatient to wait for her parents to read it to her, she said.
Her father encouraged her and her sisters to enter math competitions, which she competed in through middle and high school before majoring in math from Stanford in 2012. She chose Bay Area University primarily because it was the “best school that’s not in Boston,” she said.
Not sure what to do with her degree, she applied in her junior year for internships at quantitative trading firms that use complex mathematics and algorithms to predict market movements.
Ellison did two internships at Jane Street Capital, a large quantitative trading firm, and got a job offer after college, she said. There she met Bankman-Fried, who had worked in the firm’s New York office for several years. In 2017, he quit and moved to the Bay Area, where Ellison asked him to meet a year later. “He canceled a couple of times and then finally said yes,” she said.
Bankman-Fried told her about the cryptocurrency trading firm he recently founded – Alameda Research. She soon left Jane Street to join him. “It seemed like too cool an opportunity to pass up,” she said.
Is crypto a house of cards?
In a Tumblr blog linked to her Twitter account, Ellison said she didn’t enter the crypto world as a “true believer.” “Basically, it’s mostly scams and memes,” reads a post on an archived version of the Tumblr account. But she saw value in the core technology behind crypto, which enables transactions without a bank or government facilitating them.
“If authoritarian governments pose a serious threat to civilization, which doesn’t seem completely insane, it could end up becoming important,” reads the rest of the March 24, 2022 post.
At FTX, however, Ellison’s job was less about dodging authoritarian governments and more about making money from the explosion of interest and investment in cryptocurrencies. The company was one of the biggest winners in the massive crypto boom of 2020-2021, when ordinary people around the world invested in Bitcoin, Ethereum, and a variety of other tokens. The value of the global market swelled to around $3 trillion, roughly the size of the UK’s gross domestic product.
FTX quickly became one of the main places where people could buy, sell and speculate on cryptocurrencies. Its ads featured sports stars like Tom Brady and Stephen Curry, and it paid millions for the Miami Heat basketball team’s stadium naming rights. Many users invested on margin, meaning they placed financial bets with money borrowed from the exchange hoping their investments would pay off. By the end of 2021, FTX was processing around $350 million in crypto trades per day and making money by taking a percentage of each transaction.
Alameda was technically separate from FTX and invested and traded with the goal of making money like any other hedge fund. But it also played a key role as a market maker on the FTX exchange itself, stepping in to buy and sell tokens and other digital assets in large volumes to increase liquidity on the exchange and make it more attractive to clients.
In interviews, Ellison spoke about the challenges and excitement of the job.
“There are a lot of people who are very smart but not necessarily good in the very chaotic world of trading, especially crypto trading,” she said on the El Momento crypto podcast, published on May 25, 2022. “One never has all the information. So all you have to do is make your best guess based on what you can see.
She rose through the ranks and Bankman-Fried made her co-CEO with Sam Trabucco in 2021. In August 2022, Trabucco resigned and Ellison became Alameda’s sole executive. (Trabucco did not respond to a request for comment, and his whereabouts are unknown.) In a January 2021 podcast, Ellison described how she was responsible for the trade, with Bankman-Fried’s involvement diminishing over time.
The work was extremely lucrative. At its peak, FTX was valued at $32 billion by its venture capital investors, giving Bankman-Fried a net worth of $26 billion, according to the Spring 2022 Bloomberg Billionaires Index. Bankman-Fried, Ellison and a group of their colleagues lived in a lavish $40 million penthouse in Nassau, Bahamas. According to a report by crypto news outlet CoinDesk, the employees were romantically involved with each other, and Bankman-Fried and Ellison dated at times. Stimulants were part of the lifestyle.
“Nothing beats regular use of amphetamines to make you realize how stupid many normal, non-drug human experiences are,” Ellison said tweeted last year.
Like Bankman-Fried, Ellison was a proponent of effective altruism, a philanthropic philosophy that encourages bright young people to take high-paying jobs, accumulate wealth, and donate it. She had found the movement in Stanford, surrounded by bright and soon to be wealthy people like her.
“The ultimate goal, or one of my most important goals, I believe is to maximize my impact,” she said in the July 2020 podcast interview. “Working at Alameda is good for that for a number of reasons. I mean the direct thing is to make money.”
Bankman-Fried himself had pledged to donate his billions to the movement. In an interview published on January 21, 2021, also with the internal FTX podcast, Ellison spoke again about how she saw the value of her work.
“It’s definitely stressful at times, but it gives me a sense of purpose and meaning when I feel needed or when I feel like what I’m doing has value,” Ellison said.
The “crypto winter” has come. And it looks like an ice age.
However, behind the scenes, FTX allegedly broke the law, according to federal prosecutors. The company took customer deposits and loaned them to Alameda, which used the money for risky deals, investing in other companies, and donating to politicians and effective altruism groups.
Alameda had special access and privileges on the FTX exchange that the companies’ clients did not have, essentially allowing it to freely borrow money without having to repay loans or face the same consequences when dealing with borrowed funds lost money — a practice Ellison was aware of as early as 2019, she testified earlier this month.
In November, Bankman-Fried said at the New York Times’ DealBook conference that he had never knowingly mixed funds between Alameda and FTX and that he was surprised by the size of Alameda’s exposure to the FTX exchange.
“Of course I made a lot of mistakes. There are things I would give anything to do again. I’ve never tried to cheat on anyone,” he said.
Alameda borrowed huge amounts of money from other crypto lenders to fund Bankman-Fried’s investments and donations, but when the price of crypto assets plummeted by 2022, those lenders reclaimed their money. Ellison and her colleagues paid it back with client funds, she said, something users of the platform were unaware of.
And when investors asked questions, they, Bankman-Fried and other colleagues agreed to a lie, concealing the company’s true financial position and special arrangements for Alameda to freely dispose of client funds, Ellison told the judge.
“I have agreed with Mr. Bankman-Fried and others to provide Alameda’s lenders with materially misleading financial statements,” she said. “I’m really sorry for what I did. I knew it was wrong.”
The judge asked if she knew it was illegal too.
Dalton Bennett and Nitasha Tiku contributed to this report.