Did Caroline Ellison and Sam Bankman-Fried Cook Alameda’s Books to Save the World?

Before she worked at Alameda Research, Caroline Ellison did not think she’d break the rules of morality and also accounting. Of course, this was also before her ex-boyfriend and boss Sam Bankman-Fried convinced her that such mores were worth bending for the greater good.

The FTX chief’s creative ethics entered his criminal fraud trial during Wednesday’s plodding but emotionally charged direct questioning of Caroline. According to the government’s star witness, Sam was so engrossed in his conception of right and wrong that other people’s base principles (namely, upholding the truth and not stealing) were at best guidelines – if even that.

“The only moral rule that mattered to Sam was whatever maximized utility,” Caroline said. She testified Sam’s goal was to “create the greatest good for the most number of people.”

Therein lies the altruist. Sam styled himself a champion of the “effective altruist” movement, an offshoot of utilitarianism whose proponents seek to make as much money as possible and then give it to causes that might save the world. That was how Sam did it, at least. For a time, his crypto empire appeared to be rocketing the quirky quant toward maximum philanthropic velocity. He’d already started giving massive sums to politicians, charities and pet causes he thought could save humanity from itself.

(It came at the cost of his customers, according to prosecutors as well as “Enron John” Ray III. The crisis-era CEO of now-bankrupt FTX Group has spent the past 11 months on a highly lucrative global treasure hunt to claw back millions of donated dollars to make FTX customers whole.)

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Regardless … Sam’s maximal utility prompted Caroline to shelve whatever rulebook she’d followed before. “It made me more willing to do things like lie and steal” at Alameda, she testified. Her steady words (they later wavered) captured the jury’s unbroken attention – a rarity on a day mostly spent discussing balance sheets that almost put Judge Kaplan to sleep.

Caroline’s seven-hour long direct questioning delved into how things broke bad for the Empire of Sam. Months before Alameda collapsed, Caroline said she worried the crypto hedge fund’s borrowing of billions of dollars from FTX customers would be both companies’ undoing (she was right). That said, she said she did nothing at the time to stop the lies enabling it. Instead she perpetuated them – she bamboozled Alameda’s lenders with them.

Through a tremendous feat of Grotesquely Atrocious Accounting Principles (G.A.A.P.), Caroline said she cooked up seven flavors of balance sheet to serve lenders like Genesis (a subsidiary of CoinDesk parent Digital Currency Group), who by June 2022 had grown money-hungry in the face of its own possible collapse. Sam chose the seventh. There, Caroline had hidden Alameda’s massive FTX borrows as perhaps more palatable long term loans.

“I didn’t want Genesis or others to know Alameda owed money to FTX,” she said. Throughout Wednesday, she repeated what that really meant: Alameda owed money to FTX’s customers. It had taken their money to help it make money to help make Sam the money he needed to help save the world.

Caroline Ellison pled guilty last December to seven counts stemming from her time running Alameda Research. On Wednesday, she told the jury that she was taking responsibility for her actions. She didn’t really say whether her past failure to do so was a result of her steadfast belief in Sam’s vision – or something else. No matter: She stuck by risk-taking Sam until the castle imploded. This was the man who’d flip a coin that could either destroy the world or make it twice as good, she said Tuesday.

Ultimately the truth did come out, killing FTX, Alameda, their lenders, investors and customers, and sparking criminal investigations into Caroline and the other members of Sam’s inner circle. She said her house was raided by the FBI before she began cooperating with prosecutors – a contrast to the quiet coder Gary Wang, who volunteered himself to the government barely a week after the companies’ demise. Deputy court clerk Andy Mohan slid Caroline a baby blue tissue box as she tearfully called out to “the people that trusted us,” people she said she “betrayed.”

Caroline did not betray Sam’s own state of mind during all this (she isn’t allowed to because of the bothersome rules governing witness questioning. They’re far more rigid than ethical mores). That said, she returned to a favorite topic of this newsletter: The artifice of this alleged fraud.

Remember the Toyota Corolla we were looking for in last week’s newsletter? Caroline told the jury she saw Sam driving one at their home in the Bahamas. He’d switched from an unnamed luxury car to the most normal automobile imaginable because she said he said “it would be better for his image.”

Sitting in the courtroom hearing this, Sam – who was tapping away at his computer when Caroline later broke out in tears – shook at his highest frequency yet.

— Danny Nelson

Courtroom scenes

Judge Lewis Kaplan continues to express his respect for the attorneys trying the case – but still wound up almost mocking lead defense counsel Mark Cohen on Wednesday after he objected to Ellison saying she “believes” former FTX executive Nishad Singh told her that offsetting ledger entries in FTX and Alameda’s books were meant for auditors.

“I believe this is Wednesday. I believe this is Wednesday. That’s not speculation. Overruled!” the judge said, getting the ruling in as Cohen said “withdrawn.”

He appeared to be losing his patience with the prosecution as well, chiding Department of Justice attorneys across Tuesday and Wednesday for mislabeled exhibits and seeming exasperated with their extensive focus on spreadsheets.

The overflow room, where most reporters and members of the public are stashed during trial days, burst into laughter after Ellison said “Alameda paid what I believe was a large bribe to Chinese government officials to get some of our exchange accounts unlocked,” and Assistant U.S. Attorney Danielle Sassoon said deadpan, “Well, let’s break that down.”

During a back-and-forth after the jury left the room, Judge Kaplan again took aim at arguments advanced by the defense. Cohen and his team asked for permission to bring up artificial intelligence firm Anthropic’s recent fundraising news (a report said it’s in talks for a juicy valuation), saying it speaks to questions of portfolio investing. Prosecutors objected, saying the current value of Anthropic’s stock is immaterial to whether or not Bankman-Fried misappropriated customer funds, a view Judge Kaplan agreed with.

“This is like saying if I broke into the Federal Reserve bank, made off with a million dollars, bought Powerball tickets and won big, it’s OK,” he said.

— Nikhilesh De

What we're expecting

Caroline Ellison has one more day on the stand, facing defense attorney Mark Cohen as he continues his cross-examination.

He only had a few moments with Ellison on Wednesday, trying to ask a question about FTX’s fiat account and how it tracked its funds – however, after some initial back-and-forth, it was clear he and Ellison were on slightly different pages about how different accounts were referenced, culminating in the best objection I’ve heard so far this trial.

“Objection Your Honor, this is confusing!” Assistant U.S. Attorney Danielle Sassoon said. Judge Lewis Kaplan seemed to agree, cutting the jury loose (it was just around 4 p.m. – 30 minutes early) but keeping attorneys in the room a bit longer to sort out certain issues (see above).

It’s unclear how long Cohen’s planned cross-examination will take. One thought that's striking: While the defense team argued for the right to question prosecution witnesses about recreational drug use, Judge Kaplan said he and the DOJ need prior notice outside the presence of the jury. I haven't seen any filings as of Wednesday early evening, and the topic did not come up at the close of Wednesday's court session.

At any rate, once Cohen is done, prosecutors will have a chance to conduct a redirect. Once that’s done, we’ll likely hear from BlockFi’s Zac Prince.

BlockFi both lent funds to Alameda and was briefly set to be acquired by FTX before it all came crashing down.

— Nikhilesh De