The Breakdown - The Most Shocking Details of Caroline Ellison's Damning SBF Testimony

Episode Date: October 14, 2023

Caroline Ellison is the prosecutions star witness in the case against Sam Bankman-Fried, and after this week it's not hard to see why. NLW covers the most shocking details, including massive bribes to Chinese officials and more.  Today's Sponsor: Kraken Kraken Pro is the one-stop destination for pro traders - https://k.xyz/TheBreakdownPod Enjoying this content? SUBSCRIBE to the Podcast: https://pod.link/1438693620 Watch on YouTube: https://www.youtube.com/nathanielwhittemorecrypto Subscribe to the newsletter: https://breakdown.beehiiv.com/ Join the discussion: https://discord.gg/VrKRrfKCz8 Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the Big Picture Power Shifts remaking our world. What's going on, guys? It is Thursday, October 12th, and today we are talking all about Carolyn Ellison's testimony in the SBF trial. Before we get into that, however, if you're enjoying the breakdown, please go subscribe to it, give it a rating, give it a review, or if you want to dive deeper into the conversation, come join us on the Breakers Discord. You can find a link in the show. Show notes are go to bit.ly slash breakdown pod. Hey, hello friends. Well, I think that we all thought that there were going to be some fireworks in Caroline's

testimony. But my goodness, it is no wonder the prosecution viewed her as their star witness. Around noon yesterday, Autism Capital tweeted, Caroline Ellison of FTX admits that Sam bribed Chinese officials with $100 million to unfreeze their assets. Purposefully tried to scam Saudi investors in the final days of FTX, intentionally tried to stick regulators on finance to destroy his competition, and it's only lunchtime.

Even more simply, as Laura Shin put it, it is getting real in the courtroom today. So let's just get going, and I'll share some overall thoughts at the end, and the way that I decided to present this is actually going linearly through the prosecution's questioning rather than bunching things by theme. The reason I chose to do it like that

is that I think it gives a picture of the case the prosecution is trying to make and how they're doing it. Remember, the jury heard this information in roughly the same order that you're hearing it now. Now, as we discussed on yesterday's show, Caroline's testimony had started on Tuesday. For those of you who haven't listened to that, and who might be just coming into this for the first time, Caroline was the CEO of Alameda research and Sam's on-again-off-again girlfriend. Now, by and large, the big takeaway from Tuesday's

testimony was an undermining of Sam's argument that he hadn't been really involved in Alameda for some time. There was a decent overview of the sort of misleading conduct that was going on at Alameda, but nothing which would necessarily surprise someone who had been following the case closely. Wednesday's testimony, on the other hand, was significant. more salacious. First, prosecutors took us back to June of 2022. Luna had just collapsed, taking much of the crypto market with it. Bitcoin was down 25% in the past month and would fall another 25% into mid-June. Alts were, of course, a bloodbath. In that context, unsurprisingly, Alameda's external lenders had begun to call in their loans. Caroline was presented with

telegram discussions from mid-June, which showed Genesis's head of lending Matt Balanceweek asking for repayment. He wrote to Alameda, hey guys, seeing a fair amount of continued outflow from retail deposit aggregators. So to get ahead of this, we're going to increase the open-term loan pullback to $400 million. Matt also asked for a timeline on the first installment of $250 million, which had been previously requested. Now, as these lenders started to ask for their money back in mid-June, Caroline said, quote, I was very stressed out, and we were talking about billions of dollars, and I knew that Alameda had lost a lot of money in the cryptocurrency market downturn, and we didn't have the liquid assets to pay all of the money back, and that we would have to be taking money

from FTCX. Now, when asked to clarify about what it meant to take money from FtX, She explained that she meant drawing from Alameda's line of credit, which, quote, would be coming from customer funds. Now, pressing the point, the prosecutor asked about Caroline's mental state as she realized that Alameda had billions of dollars of loans to repay and not enough money to satisfy those requests. Caroline said, I was in sort of a constant state of dread at that point. I knew that we would have to take the money from our FTX line of credit, and I knew that the money could be called at any time. Every day, I was worrying about the possibility of customer withdrawals from FTCS and the possibility of this getting out and what would happen to people that would be hurt by that. Now, according to Caroline, Sam directed the loans to be repaid using Alameda's line of credit with FTCS. While Sam didn't explicitly acknowledge that the loans would be repaid using customer funds,

Caroline explained that he had a clear understanding of where the funds would be coming from. She said, quote, I had shared Alameda's balance sheet information with him that showed that that was the only source of capital large enough to repay all our loans. We also had many discussions in the past about using this FTC's line of credit for various Alameda purposes, including discussions about using it as a backstop if our loans were called, so I consider that to be the most reasonable and really the only option on the table. On the Alameda balance sheet, the loans funded by customer deposits were simply labeled FTX Borrowes.

Caroline said, I wanted to strike a balance of identifying what it was, but I didn't want to say explicitly something like FTX customer money. According to this balance sheet, Alameda had borrowed $13 billion from FTC's customers by mid-June before the external loans had been repaid. Now, already in mid-June, FDX had a serious asset mismatch and shortfall against customer deposits. Caroline said that the exchange was short $10 billion in USD, alongside 700 million in Bitcoin. She said, I was really worried that FTX customers would try to withdraw a bunch of money at once

and that we wouldn't be able to process those withdrawals. Caroline had analyzed some possible scenarios in May and concluded that if the crypto market went down, quote, we would be in a bad situation. She added that in June 2022, we were in the bad situation, and I was mostly concerned that if anyone would find out, everything would come crashing down. Caroline said that she agreed to use customer funds to pay back the external loans, quote, because Sam told me to. In her mind, it was basically better than the alternative option. Her thinking was that if Alameda went bankrupt immediately, it would be a really bad outcome,

but if they used customer funds to remain afloat, there was, quote, some chance that we would be able to fix things somehow that maybe Sam would be able to raise money and repay our loans. Now, from there, the prosecution zoomed in on the events surrounding the recall of loans by Genesis. On June 18th, Genesis asked for an updated Alameda balance sheet. Caroline said she didn't think it would be a good idea to ignore the request, and added that, I wanted to reassure them about Alameda's financial state, but the facts were that Alameda was in a very bad situation, that we had very risky positions on, and that we had been borrowing increasing amounts of money from FTX customers, and I didn't want Genesis to know any of that. A crisis

meeting was called between the four key collaborators, Sam, Caroline, Gary Wang, and Nishad Singh. Sam suggested the four could put their personal holdings of serum, which was, of course, an illiquid token created by Sam, on the Alameda balance sheet to bulk it out slightly. He also put forward the idea of placing FTC's equity held in a separate shell company on the balance sheet as well. Now, setting the stakes, Caroline explained why there was so much concern about the request from Genesis. She said, I didn't want them to recall the rest of our loans. I was also worried that they would share the information with other people in the crypto markets, and that might cause more widespread concern about Alameda

and could even cause people to start withdrawing their money from FTX. Sam's response was to suggest preparing some, quote, alternative ways of presenting the information to Genesis. Caroline said, I understood him to be directing me to come up with ways to conceal the things in our balance sheet that we both thought looked bad. Caroline then prepared seven alternate Alameda balance sheets. And given that this is one of the most tweeted about aspects of this whole testimony, you might have heard this part. She said, I wasn't sure what the best thing to send to Genesis would be. I didn't really want to be dishonest, but I also didn't want them to know the truth. Classic dilemma.

So I just thought I'd prepare a variety of things and ask Sam what he wanted to do. Now, some of the variations obscured the use of assets as collateral, and netted assets. against liabilities to make overall leverage and risk appear lower. One of the asset line items used to offset liabilities was around $10 billion in loans made to FTX executives. The best that Caroline could come up with was that Alameda had $7 billion in liquid assets, although that included $3 billion in FTT tokens, which she acknowledged were not liquid enough to sell at the market price. Caroline ended up sending the seventh variation of the balance sheet to Genesis. This version had dramatically reduced the stated liabilities and completely obscured the loans from FTX.

Indeed, wildly, it seems like the infamous Coin-Dest report that set all of these events in motion was actually prompted by this best possible version of the Alameda balance sheet. In other words, even the best possible version, out of seven alternatives prepared by Caroline and selected by Sam, was still enough to raise major concerns about the health of the firm. Ultimately, Genesis still called Sam up and explained that they needed to, quote, unwind 500 million and 250 clips. They explained that, quote, were basically in a position where this is no longer a luxury. Caroline's understanding was that, quote,

Genesis really needed the money and implied that they might go under or have to default on some loans if they didn't get it. Now, this has become a whole separate issue, with many people asking, did this mean that Genesis actually knew how much trouble FTX and Alameda were in all the way back in June? But we will save that for another conversation. Now, after acknowledging that she considered the creative balance sheet accounting to be dishonest, Caroline discussed Sam's ethical framework. This was one of the most resonant parts of the testimony with me, and I think one of the most explanatory things that we saw.

She explained that, quote, he said that he was a utilitarian, and he believed that the ways that people try to justify rules like don't lie and don't steal within utilitarianism didn't work. He thought that the only moral rule that mattered was doing whatever would maximize utility. So essentially trying to bring the greatest good for the greatest number of people or beings. She added that Sam said he didn't think rules like don't lie or don't steal fit into that framework. Of course, his actions, as we see, made that quite clear. Now, moving on, after meeting repayment request in June, Alameda still had four billion. and loans outstanding to Genesis, Block 5, Voyager, and numerous other smaller lenders. Celsius had asked for repayment of loans prior to their bankruptcy in July, but Sam refused to

send a balance sheet and said that Alameda would repay their loans once Celsius was prepared to return their collateral. In October, Sam suggested that Alameda should sell a few billion worth of Bitcoin if the price rose above $20,000. Caroline said, the rationale was to decrease our risk from further cryptocurrency downmoves. Now, there were only a few days in early October where Bitcoin reached this price level, although it spent 10 days there in the lead-up to the FTX collapse. Now, this is worth mentioning only because it has become wildly distorted on Twitter. Through a game of telephone, the average Bitcoin or tweet about this is that Sam and Carolyn were conspiring to keep the price of Bitcoin under 20,000.

I don't think that that's actually what the testimony suggested. What the testimony was saying is that by October, things were so dire that if markets moved up just a little bit, they wanted to get out of their position in Bitcoin in order to be hedged against crypto going down even more. In other words, it's a desperation move, not some long-term. price suppression plan. Now, that certainly doesn't mean that there weren't other points at which there was more price manipulation going on. It just means that in this specific instance, that's not really what they were talking about. Now, by that stage, Sam had agreed that FTX needed to raise additional

capital. And rather than going back to the venture firms who had participated in previous fundraising rounds, Sam apparently became convinced that he should try to get Mohamed bin Salman, the crown prince of Saudi Arabia, to become FTX's newest investor. For a little bit of insider color, Sam would occasionally talk about potential FTX fundraising at all hands meetings on Mondays. The way that he described it was always, we have a couple million dollars in the bank, but we're always open to raising more capital if the right opportunity comes up. Now, in retrospect, obviously that $2 billion number was a complete lie and or it included FTX customer deposits, and it seems likely to me that part of the reason that he discussed that on those calls was that so

if anyone heard through the grapevine through other friends in the crypto industry that FTCX had been having funding discussions, it wouldn't come as a shock that suggested the company was in trouble. And now, a word from our sponsor. Today's episode of The Breakdown is brought to you by Cracken. Cracken Pro gives advanced traders a customizable, all-in-one interface for trading and buying about 200, depending on your region, crypto assets, stable coins, and fiat currencies. In addition to deep liquidity, world-class security, and a dedicated mobile interface, Cracken Pro also has some of the best in class support, with average support resolution time

less than five minutes this year. Go to crackin.com slash the breakdown to get started. Disclaimer, not investment advice. Cryptotraiding involves risk of loss. Cryptocurrency services are provided to U.S. and U.S. territory customers by Payward Ventures, Inc., PBI, DBA, CRACN. Now, from there we got to one of the craziest parts of the testimony, which actually is not even really supposed to be the subject of this trial because it's going to come up in a separate trial that Sam will face at the beginning of next year. The context and setup for this part of the testimony, was the prosecution talking about using signal and self-deleting message apps as a primary

way of communicating. And when Carolyn was asked to recall an example when speaking encoded terms was deployed at the firm, it prompted one of the more insane stories to have come out of the whole affair, and one which, as Matt Walsh put it today, makes it extra sad how crappy Michael Lewis's Samapologist tome was. So Caroline began to explain what happened when, quote, Alameda paid what I believe was a large bribe to Chinese government officials to get some of our exchange accounts unlocked. Apparently, in 2021, Alameda had around $1 billion in funds frozen across Huobia and FTX. They were told the funds were frozen due to a Chinese government money laundering investigation, which was looking into a former Alameda trader. Alameda engaged lawyers in China,

but were unsuccessful in getting the funds released. After that failed, Caroline claimed that, quote, on OKX, we made several accounts using the IDs of different people who I believe were Thai prostitutes. Alameda then attempted to conduct very imbalanced trades against these accounts using their frozen funds. The hope was that they could use what had become known as the Thai prostitute accounts to make money and be able to withdraw it. Ultimately, this strategy was unsuccessful, so Alameda turned their attention to doing things the, quote, David Maway. The Alameda employee had apparently suggested that they simply bribed their way out of the situation. Now, another Alameda employee named Handy, who is the daughter of a Chinese government official,

objected to this course of action, saying, she thought it was a bad idea and would get us in trouble. During the discussion about what should be done, Sam apparently yelled at Handy and told her to, quote, shut the F up. Handi quit shortly afterwards. Caroline then told the court that Alameda forged on with the bribery plan, distributing around $100 million across a number of crypto addresses in November 2021. The funds were released, but Hondi's split with the firm was acrimonious. At one stage during a month's long dispute about severance payments,

Sam Tribuco, who was then co-CEO of Alameda, wrote to the executive team, Did Handi's father immediately turn us in or something? SBF simply replied, lull. This whole incident and the negative $150 million that were spent on these bribes ultimately made it to a spreadsheet as, quote, the thing. Now again, this wasn't necessarily supposed to be the subject of this trial, and after a lengthy sidebar, the judge ended up explaining to the jury that Sam isn't on trial for this conduct, and that they should only consider it as evidence of motive. From there, prosecutors moved back to

the summer and fall of 2022, and the desperate attempt to keep FTCS afloat by gathering additional funds. At that time, FTX was in the middle of acquiring Cryptolender BlockFi. Caroline said that, quote, Sam suggested that we could get some of either BlockFi to loan more money to Alameda or get BlockFi's assets moved on to FTX. Caroline was asked about her relationship with Sam at the time, and she said that they had broken up a few months prior, and that she was trying to avoid spending much time with him or attending one-on-one meetings. In August, however, they had an in-person discussion about the state of Alameda's finances.

According to Caroline, Sam started saying that he thought Alameda should have hedged way more earlier in the year, and that it was a big mistake and that it was my fault and that I was largely responsible for the financial situation that Alameda had ended up in. The meeting apparently got very tense, with Sam ending up screaming at her, and Caroline ending up crying. Later in the fall, Alameda did hedge by shorting several billion dollars worth of NASDAQ futures, using $2 billion of collateral to put on the position, which Caroline admitted came once again from FtX customers.

Now, hedging was the first item on Carolyn's infamous things Sam is freaking out about list, which she said was updated frequently. The list was placed into evidence and included attempting to acquire or buy stock in Snapchat and trading Japanese government bonds. Another point on the list was, quote, getting regulators to crack down on finance. To that point, Caroline said that Sam, quote, thought that was one of the best potential ways for FTX to improve its market share. He said that if there was regulatory action taken against Binance,

that a lot of Binance customers might move to FTX, and various regulators had been promising him that this would happen for a while, but it never happened. Another detail that came out through her testimony was just how intentional Sam had been in cultivating the image of himself, with the scruffy hair and the crappy car. Indeed, apparently when they got to the Bahamas, Caroline and Sam were both assigned luxury company cars,

but Sam had them downgraded to a Toyota Corolla and a Honda Civic, because he thought it was better for their image. The prosecution also discussed a range of political and charitable donations that were made throughout 2022, including some made after external loans were repaid in June, implying strongly that they were made after Sam knew the only source of capital was customer funds. Now, coming into the final week of the company, when customers were withdrawing funds at a rate of over $100 million per hour, Caroline said, I was terrified.

This is what I had been worried about for the past several months and it was finally happening. I thought that at this point, everything about FTX and Alameda was going to come out. Caroline discussed some of the damage control that was being done as the deposit run escalated. She said that she found Sam's communication misleading, specifically when he had tweeted FTCS is fine, assets are fine. Sam had also posted that delays in processing withdrawals were just related to anti-spam checks and capacity issues. But Caroline said, I believe the primary problem was that FTX just didn't have enough assets to process all the withdrawals. And indeed, at the same time that he was making public statements that FTCS had enough assets to cover

customer withdrawals, Caroline said that he privately acknowledged that they only had enough to cover about one-third of deposits. Now, one of the pivotal moments that you might remember from that whole thing was when, in the wake of Binance CEO, CZ, saying that he was going to sell their holdings of FTT, Carolyn responded that Alameda would buy it all at $22, which basically everyone agreed was a stupid decision as soon as we saw it, but the new revelation wasn't just that it was dumb, but that it was originally drafted by Sam himself, and workshopped with Nishad as well. Apparently, after spending around $100 million, Sam made the call to give up on defending FTT's price. The prosecution then introduced a text conversation between Carolyn and Sam from the last Monday at FTX, as customer

withdrawals had hit their peak. Earlier, Caroline had written to Sam, if things got a lot worse, I don't think I'm going to handle it well. She replied to her own comment and wrote, That was such a bad prediction. This is the best mood I've been in in like a year, to be honest. Sam responded, wow, huh? Congrats? Because shit's exciting? Carolyn replied, I think I just had an increasing dread of this day that was weighing on me for a long time. And now that it's actually happening, it just feels great to get it over with one way or another. At this point in the courtroom, Caroline into immense tears. She said, to be clear, this was the overall worst week of my life. I had a lot of mood swings during that week and a lot of different feelings. But one of the

feelings I had was an overwhelming feeling of relief because, as I said, this had been something that I had been dreading for so, so long. It's something that had been on my mind every day, worrying about what would happen when the truth finally came out. And I felt a sense of relief that I didn't have to lie anymore, that I could start taking responsibility and being honest about what I had done, even though I obviously felt indescribably bad about all the people that were harmed and the people that had lost their money. The employees that lost their jobs, people that trusted us that we had betrayed. When asked why she shared these feelings with Sam,

Caroline said, I didn't know who else I could share it with. Now, in terms of how those tears went over, YouTuber Coffeezilla tweeted, I think it probably moved the jury. I know in the overflow room where I was, you could hear a pin drop. She was bawling. First real show of emotion we've seen from her.

I think it really reached a lot of people. Now, Caroline is back for the bulk of her cross-examination today, and after that it's expected the prosecution will call BlockFi CEO, Zack Prince, as their next witness. To the extent that the cross-examination has anything other than just the judge being really upset at the defense, I will of course cover it on a future show. But overall, obviously, this was devastating to pretty much all of Sam's arguments.

Sam's defense has rested on two things. Some combination of, I didn't mean to break any laws, and I didn't actually know what was going on on Alameda. It's nearly impossible, I think, to hear this testimony and believe that Sam didn't know what was going on at Alameda, basically at any point. On top of that, which I think we all assumed, I resonate strongly with what Zeke Fox wrote when he said, Caroline's testimony today confirmed what I long suspected. Under Sam's version of utilitarianism, lying and stealing was fine,

as long as it led him to making more money. Simply put, this was a guy who not only didn't believe that the rules applied to him, but that the very idea of rules was a false construct, one for sillier, stupider people. But so far, everything in this case subsequent to the collapse has suggested that, yes, Sam, the rules apply to you too. Anyways, guys, a crazy couple days at the SBF trial.

It certainly drowned out pretty much everything else going on. Hopefully tomorrow we will have something to discuss that's not just former Cryptocycle drama. But for now, that's going to do it. I appreciate you guys listening as always. And until next time, peace.