The Journal. - The Trial of Crypto’s Golden Boy: Caroline Ellison

Episode Date: October 12, 2023

Caroline Ellison, the former CEO of Alameda, took the stand for a second day Wednesday. Producer Rachel Humphreys and WSJ’s Caitlin Ostroff discuss Ellison’s testimony and what it revealed about alleged bribes to Chinese officials, misleading statements to investors, and the final days of FTX. Further Reading: - What’s Happening Today at the Sam Bankman-Fried Trial  Further Listening: - The Trial of Crypto’s Golden Boy  Learn more about your ad choices. Visit megaphone.fm/adchoices

Day two of Caroline Ellison's testimony, former CEO of Alameda. She's been on the witness stand all day being questioned by the prosecution and we had tears at one point. Yeah, at one point she was recalling pretty much the week that Alameda and FTX collapsed and she started crying. Someone had to hand her a box of tissues on the stand. And apart from that, we also had her testifying about Sam Bankman-Fried directing her to bribe Chinese officials. She testified that Sam Bankman-Fried blamed her for Alameda's losses and she testified to Bankman-Fried directing her to lie to investors and to lie on social media about the true state of affairs at Alameda and at FTX.

Yeah, there was a lot today of her kind of outlining what Bankman-Fried knew about Alameda's financial positions, what he told her to do in terms of loan repayments, you know, him allegedly trying to put blame on her. Yeah, it was a lot to take in. How would you say this day has gone for Sam Bankman-Fried and his defense team? That's the thing I think we're really still trying to figure out. There wasn't really a main smoking gun.

There wasn't necessarily a message from Bankman Freed saying, you know, I know this is all wrong, but go ahead and do it. But there was a lot of really major testimony from Ellison on all the different points she said happened in this journey. From the Journal, this is the trial of crypto's golden boy. I'm Caitlin Ostroff. And I'm Rachel Hempfries. Coming up, Caroline Ellison's side of the story. We'll see you next time. book your reservation. And when you get to the main event, skip to the good bit using the card member entrance. Let's go seize the night. That's the powerful backing of American Express. Visit

amex.ca slash yamx. Benefits vary by card, other conditions apply. I'm worried actually, in this episode, we're going to bury the lead, Caitlin. Which is? Well, that you've bought enough coffees that you now have earned a free coffee at the court cafeteria. I have. I'm very excited to use that. I have like three punch cards at this point, too. Yeah. So, it's the second day of Caroline Ellison's testimony. She is the government's star witness. Now, remember, she's pleaded guilty to seven counts, including wire fraud and

conspiracy to commit securities fraud. And she's working with the government in exchange for leniency. And she was on the stand for hours today. Yeah. Yeah. A long time. She had a long day. She had a long day to help build the prosecution's case against Sam Bankman Freed. And prosecutors this morning started by asking Ellison about Alameda's debt and the lengths Ellison said Alameda and Sam Bankman Freed went to, to mislead everyone about the state of its finances. Yeah. And Ellison said that that really started in June 2022. If you'll remember from our pre-trial episodes, that was when the value of pretty much all cryptocurrencies were just crashing.

And meanwhile, Bankman Freed was offering to help out a bunch of these companies that were hurting and appeared to be crypto's savior. And meanwhile, the testimony that Ell Alison gave us today told quite a different story from inside Alameda. She was having quite a different experience, it seemed, at the time. Yeah, so she was the CEO of Alameda, the trading firm that Bankman Freed founded. And she said that from June 2022, she was in this constant state of dread. Dread is a word that came up repeatedly in how she described the end of 2022 today. And the thing that she said she was worried about at the time was that Alameda owed a lot of money. And Alameda owed a lot of that to FTX customers who they had

been borrowing from without the customer's knowledge. And then on top of that, they also owed money to a bunch of companies. And those were the crypto lenders that helped Alameda make investments. Right. And the worry was that if those third-party lenders also started struggling in a crypto downturn and a price crash, that they would need their money back. And guess what? It happened. It happened and added to Ellison's stress that she talked about today. And so Ellison testified that Bankman Freed directed her to repay Alameda lenders using the only money they had, which was

FTX customer funds. And prosecutors asked Ellison how she felt about using customer money at the time. And she said, quote, I thought it was wrong. And she also talked about how FTX and Alameda kept this under wraps. Yeah. So she said that she was very careful not to put anything inviting that she felt she shouldn't be. You know, whether it was a spreadsheet or her notes that she wrote, she would often kind of use different phrasing for things that would basically mean FTX customer funds. And that wasn't the only way that Ellison said she covered up what was going on. She testified that Bankman-Fried directed her to create alternative balance sheets, which are basically the statement of a company's

financials for Alameda that concealed that they were taking money from FTX customers. And this is when we got to the part of the day which I sort of referred to as the like spot the difference moment of evidence where they showed the balance sheet that actually showed what was going on with Alameda's finances. And then they showed the alternative balance sheet that Alison said she made for Bankman-Fried and that she said Bankman-Fried wanted to show to lenders. This kind of illustrated an attempt to kind of hide what was really going on at Alameda, didn't it?

Yeah. Alison said that Bankman-Fried was directing her to distort the reality a bit of, you know, Alameda's financial position. And that there was worry about how lenders would react if they saw the actual state of their finances, if they saw how risky it was, the fact that they were taking FTX customer funds. And that was something that Ellison said she worried about. customer funds. And that was something that Ellison said she worried about. And she worried about the lenders sharing those spreadsheets, sharing that information with the rest of the crypto world. Yeah, and she often worried about these lies getting out. And she even testified that the longer she worked at Alameda and for Bankman Freed, the more and more willing she said she became to lie and to steal. And a lot of those alleged lies were huge.

And we're going to talk about them after the break. With Uber Reserve, good things come to those who plan ahead. We'll be right back. When your celebration of life is prepaid in advance, it becomes a gift from you to your family later, because no one should have to plan for a loss while they're experiencing one. Paying in advance protects your loved ones and gives you the peace of mind you deserve. Let us help you plan every detail with professionalism and compassion. We are your local Dignity Memorial provider. Find us at dignitymemorial.ca. One of the big reasons that Caroline Ellison has been such an anticipated witness is because of the expectation of what else she would be able to tell us about Bankman-Fried's state of mind last year. And there was a point in

proceedings today where Ellison testified that while working at Alameda, she made a huge effort to address Bankman-Fried's concerns. And she even kept a document called Things Sam is Freaking Out About, which she said she often updated. That led to a little laugh, didn't it? Yeah. We were in. And we got to take a look at that list in court. So what were the things that Bankman-Fried, according to Ellison, was freaking out about? Yeah. So one of the top main points was bad PR. And then she kind of went on to say, you know, Bankman-Fried is also worried.

He was very focused on pushing regulators to crack down on one of their rival companies. And then there were just kind of some other like random bits on there that like surprised me. One was that Bankman-Fried wanted to buy the company that owns Snapchat, which I wouldn't have had on my list of things Sam was focused on, but apparently it was there. It definitely was a very random list, and it was quite long. And from Ellison's testimony, it seemed that there were a lot of things to freak out about at FTX.

At one point, the prosecution asked her about a bunch of Alameda's money that was trapped in China. Ellison testified that Mike Winfried and his colleagues had an interesting strategy for getting it back, didn't they? Yeah, so this goes back to 2021, actually. There was an investigation by the Chinese government into someone who had traded with Alameda, they didn't really say who that was. But as part of that, there was some money that Alameda had kind of frozen on two big crypto exchanges that they had traded on. And it was about a billion dollars worth of money that they were trying to get out and trying kind of everything they could think of. And Ellison testified that, you know, at one point,

there were really heated discussions between Bankman Freed and some other FTX and Alameda employees about how they could unfreeze that money, how they could get it out. And in the end, Ellison testified that Bankman Freed decided on a solution, paying $100 million to Chinese government officials. And that was so those officials could unfreeze Alameda's money. And in the end, Alameda did make the payments, according to Ellison. Yeah, and Ellison said that that was a really contentious period and really contentious

time figuring out what to do. At one point, Ellison said that Bankman Freed blew up at another employee, telling them to shut the F up. As we know, everything fell apart at FTX and Alameda in early November 2022. And Ellison shared some of her experiences of that week with the court today, didn't she? Yeah, Ellison spoke about her life during that final week and a half-ish. And she was in Japan at the time, actually. But she said that, you know, throughout the week that everything started falling apart,

Bankman-Fried directed her to post what she viewed as misleading statements on social media. We actually saw a Google Doc that had the drafts of a post that she ended up writing where Bankman-Fried and others from the inner circle weighed in on what to say to the public. And Ellison testified that the purpose of those statements was to calm things down and avert disaster, but it didn't work. but it didn't work. So then prosecutors pointed Alison to a November 7th chat between her and Bankman-Fried. And that's when everything really started coming apart at the seams and the sheer magnitude of the collapse was starting to become clear. And you were really getting a sense from her testimony that it was building and she was becoming very stressed. And in those chats,

Alison told Bankman-Fried that she actually felt good. Yeah, they showed us copies of these messages that they had exchanged. And Alison told the court that, you know, when FTX was collapsing in Alameda along with it, she was undergoing a lot of mood swings, but she said that it was a relief that she didn't have to lie anymore. And as she was speaking, she started to cry a little bit. At one point, someone came up to the witness stand and handed her kind of this small square box of tissues for her to take from. And, you know, she kind of stopped crying, but she said that it was, quote, overall the worst week of my life. So Ellison, as we've said, Caitlin, was the star witness in this case. Now that prosecutors have wrapped up their direct examination of her, what do you think they've tried to show about Sam Bankman-Fried?

Ultimately, they've been trying to show that Bankman-Fried intended to defraud FTX customers. It was mentioned by Ellison repeatedly that he directed her to use FTX customer funds and cover up the fact that they were taking them in the first place. But there wasn't really a smoking gun today, in my mind. We got a picture of who Bankman Freed is, according to Ellison. And she described someone who was very focused on cultivating his own image. She said that he was really concerned with his curly hair as part of that. Yeah, he talked about it being very valuable, she testified at one point. Yeah.

And she said that he called the shots and that he directed the cover up. Yeah, but it still feels like there's a lot of this case to unfold. And we're going to hear much more from Alison tomorrow when the defense gets their chance to question her. She's got, I think, quite a few more hours on the witness stand. And we're going to see that play out in court tomorrow. The Child of Crypto's Golden Boy is part of The Journal, which is a co-production of Spotify and The Wall Street Journal. I'm Caitlin Ostroff.

And I'm Rachel Humphries. Thanks for listening. Head to The Journal feed to catch up on our previous episodes and check back here for trial updates.