Caroline Ellison delivers the financial smut we’ve been waiting for

At a glance

• Caroline Ellison’s highly-anticipated testimony kicked off on Tuesday, the first day of the second week of Sam Bankman-Fried’s criminal trial.
• Ellison appeared upbeat and calm, even cracking a joke here and there. Her testimony claimed that Bankman-Fried instructed her to commit fraud.
• FTX co-founder Gary Wang concluded cross-examination, which included the defense highlighting that some directives were signed by Ellison instead of Bankman-Fried.

Caroline Ellison’s testimony in the trial of Sam Bankman-Fried got into full swing today in downtown Manhattan. Perhaps the star witness of the trial, her mini-celebrity contributed to a festival atmosphere around the courthouse after a muted first week.

YouTube fraud-buster Coffeezilla viewed the trial from an overflow room alongside Sam-whisperer Tiffany Fong. Ellison’s testimony was so highly anticipated that several young New York crypto industry professionals had also come to watch her.

Ellison’s testimony kicked off with a timeline of her employment at Alameda Research, starting in March of 2018 when she was recruited as a trader, in what she said was her second-ever full-time job. The tensions inherent in Ellison’s on-again, off-again romance with her boss, who she testified instructed her to commit naked embezzlement on a gargantuan scale, lie near the heart of the trial. Ellison also told the court that she and Sam began sleeping together in the fall of 2018, then began a romantic relationship in the summer of 2020.

In their personal life, Sam told her about his many vast ambitions. “He said at one point he thought there was a 5% chance he would become President [of the United States] one day,” she said.

Ellison’s testimony established Bankman-Fried’s control

But today’s friendly questioning of Ellison by the prosecution was focused on ensuring that the jury knew Bankman-Fried was in the loop for, or directing, all of the core maneuvers that constituted the FTX Shuffle.

Ellison’s testimony established that Bankman-Fried was still CEO of Alameda Research when the practice of extending Alameda a huge line of credit was initiated. That line of credit and other means, Ellison also described in detail, were how Alameda borrowed, then invested or simply spent, huge amounts of FTX customer deposits.

Broadly, Ellison’s testimony drove home that letting Alameda borrow FTX customer funds at will, and for a wide variety of uses, was taken nearly for granted within FTX. It was so habitual that at one point, in documents shown to the courtroom, FTX and Alameda senior executives considered the available FTX balances as a source of liquidity in calculating whether or not to commit money to start a $3 billion dollar FTX venture capital fund.

Read more: Sam Bankman-Fried’s $500M stake in AI startup ‘irrelevant’, prosecutors say

The venture capital fund incident also further drove home that the two companies were not really functionally or financially separate. Ellison testified that she had determined that committing such huge sums to a venture capital fund, making them unavailable for customer withdrawal, presented serious risk in the event of market headwinds.

But Bankman-Fried overrode Ellison’s judgment and established the fund anyway – likely further cementing in the jury’s mind that he was the one really in charge. Although the money was coming from Alameda’s coffers, the fund would be called FTX Ventures, because Bankman-Fried thought the FTX brand was healthier in the public eye and he didn’t want to be associated with Alameda. However complex the mechanics under the hood, this odd behavior should intuitively sound to the jury like something fishy is going on.

Ellison’s testimony came after the conclusion of Gary Wang’s cross-examination by Christian Everdell for the defense. Everdell was sharper today than he seemed for much of last week, and the aim of his lines of questioning for Wang were generally much clearer.

This included an attempt to deflect responsibility from Bankman-Fried by displaying to Wang chats in which Bankman-Fried was critical of Ellison’s leadership of Alameda Research. Specifically, Bankman-Fried wanted Ellison to put on a specific hedge, but she didn’t. This is a likely preview of how the defense will try to characterize Ellison when she is cross-examined: as a bad leader in over her head, and a bad risk manager who lost a lot of money for Alameda.

Ellison outlines the (financial) polycule

During Ellison’s testimony, observers got to witness arcane (but occasionally juicy) financial smut. Ellison’s retelling of one of the earliest, truly huge deployments of customer deposits was particularly of note.

In the early summer of 2021, Ellison said Sam told her he wanted to buy back $2 billion in FTX equity from Binance. Ellison testified that she believed, and said at the time, that there wasn’t enough money to do that – but that Sam thought it was important. So $1 billion in customer balances were loaned to Alameda to cover the shortfall.

Ellison said it was “the first time I can recall an amount that large.”

Ellison’s testimony took a turn for the boring, as prosecutors and the witness reviewed a seemingly endless series of spreadsheets, created by the twentysomething executive team on the fly as their crisis deepened.

These spreadsheets were drawn up between late 2021 and mid-2022 to answer a fairly critical question: whether or not to repay Alameda’s various debtors. To answer this question, the team had to answer what should have been a simple question: how much money Alameda Research had.

These were amateurish, hilarious spreadsheets, echoing the infamous spreadsheet shared by Bankman-Fried himself soon after the collapse of FTX. It seems likely that no accountants are seriously implicated in the FTX scandal, because there have been absolutely none in sight – it’s all just 27-year-olds writing numbers on virtual napkins.

Read more: Sam Bankman-Fried’s parents show signs of stress as defense flounders

There were broad estimates and frequent inconsistencies. Related documents intended to forecast risks used Effective Altruism-tinged language to calculate the “expected values” of various decisions under various scenarios. What mattered most, though, was that the documents showed Bankman-Fried himself to have been aware of the increasingly huge hole that was effectively being hidden off FTX’s balance sheet via Alameda.

The prosecution also had Ellison walk the jury through the concept of an “illiquid asset,” specifically focused on the example of the FTT token created by Bankman-Fried and FTX. Ellison’s testimony helped establish that these tokens had been essentially gifted to Alameda at their creation, that they were thinly traded, and that selling them directly into the market would have driven their price to something close to zero. This was important to establish the risk, if not fraud, inherent in using FTT as loan collateral, particularly if customers ever decided to take their money out.

This stretch of testimony was a good example of the prosecution’s knack for getting a rough concept across in its broad outlines without getting hung up on details. As one courthouse veteran sagely intoned to me today, it’s a marathon, not a sprint, and the prosecution is taking its time to imprint details into the jury’s minds, and be clear about how facts relate to one another.

Wang’s done

Though Ellison was the headliner, the day began with the conclusion of the cross-examination of FTX co-founder Gary Wang.

Wang’s testimony included one of the funniest exchanges of the day, at least for real financial fraud geeks:

“Are you aware of the difference between solvency and liquidity?” Everdell asked Wang.

“Now I am,” replied Wang, sending a wave of laughter through the journalist-packed overflow viewing room.

Everdell also asked a series of questions about the infamous loans made to FTX executives, then funneled into various investments and expenditures. Everdell worked to establish that FTX lawyers, including Dan Friedberg, were the agents who brought the promissory notes to Wang.

Read more: Who’s Gary Wang, the co-founder of FTX testifying against Sam Bankman-Fried?

This could serve two purposes for the jury: First, it insulated Bankman-Fried from direct personal involvement with one leg of the alleged fraudulent scheme. Second, it laid out a small portion of an “advice of counsel” defense by implying Friedberg and other lawyers gave incompetent legal guidance.

In reviewing the loan documents, Everdell also displayed one that had clearly been signed by Ellison – not, that is, by Bankman-Fried.

There wasn’t much more of note, in the grand scheme of things. Again Everdell hammered at length at details surrounding Wang’s testimony and cooperation agreement. Call me crazy, but I’m very skeptical that jurors are going to look at Wang and draw the conclusion Everdell is inviting: That this quiet Google engineer is in fact a corrupt criminal mastermind now entangled in a grand frame-up of Bankman-Fried in cahoots with the Department of Justice and the Federal Bureau of Investigation. That dog don’t hunt.

Up next: The droning horror of malformed Excel spreadsheets

The more salacious and fraught parts of Ellison’s testimony are likely to be the focus for the defense, who won’t be cross-examining her until tomorrow afternoon at the earliest. They, the trial so far has suggested, may try to focus on her real or perceived weaknesses as a trader or leader as part of an attempt to shift blame away from Bankman-Fried.

All in all, Tuesday October 10 was likely a preview of the marching doom that awaits us all for the next five weeks: interminable assaults by spreadsheet, the droning repetition of numbers attached to account names that might as well be floating through outer space as a computer server in the Caribbean. An unspooling litany of dollars and debits, chanted by affectless gnomes like the tech-priests of a howling nightmare future.

All that accumulated minutiae is, it must be said, necessary to really drill the testified facts into the juror’s heads. It’s complicated stuff, and the prosecution is being methodical. It’s a double-edged sword, though: No fewer than two jurors have been seen falling asleep in court, one for long, repetitive stretches. She’s hidden from the viewing area behind a monitor, and for whatever reason it seems the judge hasn’t really noticed her dreamland excursions yet either.

Today, ever so briefly, I too began to feel the weight of my eyelids. We were somewhere around the fourth spreadsheet containing entries that might as well have been algebra conducted in heiroglyphics. Just for a moment, before my journalistic integrity kicked back in, in the comfortable leatherette armchair paid for by my very own US tax dollars, I let my eyes drift shut.

But after that brief rundown, the balance of Ellison’s testimony for the day was much drier, largely focused on transactions and balance sheets.