MARIO DUNCANSON / Contributor/ Getty Images/ Caroline Ellison’s Twitter

• Former Alameda Research CEO Caroline Ellison pinned FTX’s downfall on disgraced cofounder Sam Bankman-Fried, new court documents show. 
• Prosecutors are accusing Bankman-Fried of using his Alameda trading firm as “his personal piggy bank.”
• “Ellison, at Bankman-Fried’s direction, caused Alameda to manipulate the price of FTT,” the SEC complaint reads. 

Former Alameda Research CEO Caroline Ellison is at the center of what federal prosecutors are calling “one of the biggest financial frauds” in US history.

Ellison was the head of Sam Bankman-Fried’s quant trading shop, which once managed $14.6 billion in assets. The trading titan, along with Bankman-Fried’s crypto exchange FTX, filed for bankruptcy protection last month after a Coindesk report revealed that FTX’s token FTT—a coin made up by the exchange—was used to prop up Alameda’s balance sheet.

Around $8 billion of customer deposits were seemingly vaporized overnight. 

But Bankman-Fried claimed he didn’t “knowingly commingle funds” between Alameda and FTX. The MIT grad and former Jane Street trader chalked the $8 billion hole up to poor accounting in conversations with a Bloomberg reporter.

Bankman-Fried was using Alameda as “his personal piggy bank to buy luxury condominiums [and to] support political campaigns,” according to the US Securities and Exchange Commission complaint on Wednesday. Bankman-Fried gave more than $46 million in bipartisan political contributions since 2020, according to non-profit OpenSecrets.org.

The dethroned exec was arrested and charged on eight counts including wire fraud, conspiracy to commit money laundering, and campaign finance violations. “I fucked up, and should have done better,” he tweeted on November 10 after FTX’s liquidity crunch had already cascaded into a full blown crisis. 

On Wednesday, Ellison and FTX cofounder Gary Wang were charged with defrauding investors as well.

Ellison, who previously had a romantic relationship with Bankman-Fried, is aiding prosecutors in the investigation of FTX’s downfall, along with Wang, according to the US Attorney for the Southern District of New York Damian Williams.

Ellison pleaded guilty to all charges and, according to the regulator’s complaint, has seemingly shifted blame to Bankman-Fried. 

‘At Bankman-Fried’s direction’

The phrase “at Bankman-Fried’s direction” is listed 10 times in the 38-page document, most often linked to Ellison. 

For context, Ellison was a trader at Alameda during the time Bankman-Fried acted as CEO, but later stepped up as the firm’s co-CEO in 2021. Bankman-Fried has a 90% stake in Alameda, while Wang owns the other 10%.

Until last month, Ellison was “responsible for Alameda’s day-to-day operation,” according to the SEC complaint.

Prosecutors are accusing Ellison of manipulating the price of FTT, the token that was often used as collateral for undisclosed loans by FTX of its customers’ deposits to Alameda. 

“Ellison, at Bankman-Fried’s direction, caused Alameda to manipulate the price of FTT by purchasing large quantities of FTT on the open market to prop up its price,” the SEC complaint alleges, shifting some of the blame to the former crypto mogul.

Under Bankman-Fried’s direction again, Alameda created automated bots to “conduct trades and execute transactions” to purchase FTT at certain prices points, according to the SEC.

“On more than one occasion, Alameda and Ellison, at Bankman-Fried’s direction, actively engaged in the trading of FTT with the goal of supporting the price of the token,” the complaint says. “On these occasions, Alameda adjusted the trading parameters of its trading bots in order to support the price of FTT.”

“This manipulative activity was in furtherance of Defendants’ scheme because it allowed Ellison and Alameda to engage in further borrowing, while concealing Alameda’s true risk exposure,” the complaint reads.

Ellison used funds funneled from FTX customer deposits into Alameda to service debt to third-party lenders and execute speculative trades with very little risk management.

“Defendants knew that none of this was disclosed to FTX equity investors or to the platform’s trading customers,” per the SEC, referring to both Ellison and Wang.

Ellison would prepare the balance sheets each quarter to show these third-party lenders, but did not state that these “loans,” which was just FTX customer money, was from the exchange.

“Instead, Ellison, at Bankman-Fried’s direction, combined this liability with loans Alameda had received from third-party lenders to obscure Alameda’s intertwined financial relationship with FTX,” the complaint reads.

Bankman-Fried even told Ellison to tweet and publicly reassure investors that Alameda was “financially sound” after the bombshell Coindesk report came out.

Ellison tweeted on November 6 that the balance sheet was “for a subset of our corporate entities, we have > $10 billion of assets that aren’t reflected there.”

Ellison added: “…given the tightening in the crypto credit space this year we’ve returned most of our loans by now.”

—Caroline (@carolinecapital) November 6, 2022

 

“The tweet was designed to provide false reassurance to customers by implying that Alameda had additional assets that meant its financial condition was stronger than the balance sheet suggested,” per the complaint.  “At the same time, the tweet omitted the fact that the balance sheet did not accurately reflect the significant debt that Alameda owed to FTX.”

The complaint reads: “In contrast to the positive message in her tweet, at that point, Ellison knew, or was reckless in not knowing, that Alameda was insolvent.”

Despite being co-CEO of Alameda, Ellison usually consulted Bankman-Fried prior to making any big decisions regarding the firm as well.

“Though Ellison made some trading decisions, she frequently consulted with Bankman-Fried, particularly about strategic issues and significant trades,” according to the complaint.

On Thursday, Bankman-Fired was granted bail and will live with his parents in Palo Alto, California.