Caroline Ellison and the hedge fund that wouldn’t hedge
How fitting is the Alameda CEO’s sentence for her role in the FTX saga?
Former Alameda CEO Caroline Ellison was sentenced on Tuesday to two years’ imprisonment and ordered to forfeit $11bn for her role in the FTX collapse.
The prison sentence is considerably less than the maximum she faced of 110 years, much less than SBF’s 25 years, notably less than Ryan Salame’s 7 ½ years, but more than had generally been anticipated. The government’s sentencing submission for their star witness against SBF had been nothing but glowing. The probation department had recommended a sentence of time served. Prediction market Polymarket suggested only a 16% chance of 24+ months. Even the judge was effusive: “I've seen a lot of cooperators in 30 years here. I've never seen one quite like Ms. Ellison.”
Plea deals: incentivising being closer to the action
The contrast between Ellison’s sentence and Salame’s surely creates a questionable incentive structure: if you take part in a crime, get yourself more deeply involved so that if caught, you can earn yourself leniency through cooperation.
Ellison and SBF faced the same maximum sentence of 110 years, while Salame faced up to 10 years; no one denies that Salame was far less deeply involved than they were. But by remaining on the periphery, Salame clearly had a lot less information to bargain with. In fact, Salame claims that he cooperated with authorities from day 1 to the best of his ability, but when it came to helping the government convict other alleged criminals, he had “nothing to offer them without lying”.
And it appears that assistance putting others behind bars is the type of “cooperation” that really mattered in the end. While Judge Kaplan showered praise on Ellison for her cooperation, he dismissed Salame’s as self-interest, even though Ellison only started cooperating seven days after Salame when the FBI raided her home.
Plea deals: incentivising lying
The shortcomings of the plea bargain system have been covered extensively elsewhere. Perhaps there exists a better alternative. Perhaps it is the worst system of justice except for all the others. Or perhaps its superiority depends on the details of its implementation. The ethics and efficacy of the practice in general is not my focus here.
But given the central importance of Ellison’s testimony in convincing a jury to find SBF guilty, this case may present a particularly compelling illustration of the injustice that can occur when the plea bargain system fails. “Cooperating” might be considered more deserving of reward the more critical it is to securing a just conviction, but this must be tempered by the ever-present possibility that the testimony is false, and how much more regrettable it is the more critical a cooperator is to securing a wrongful conviction.
In its 5K1 letter for Ellison, the government makes clear its position that without her help, their efforts to convict the Crypto King would have failed: “[Ellison’s] extraordinary cooperation…was crucial to the Government’s successful prosecution of Samuel Bankman-Fried…Ellison’s testimony was a cornerstone of the trial against BankmanFried. As Alameda’s nominal CEO and Bankman-Fried’s former girlfriend, Ellison was uniquely positioned to explain not only the what and how of Bankman-Fried’s crimes, but also the why….Ellison’s testimony was critical to indict and convict Bankman-Fried, and to understanding both the timeline of the fraud schemes, and the various layers of wrongdoing. In short, the ‘what’ and ‘how’ of the crimes, as well as the ‘why,’ would have been difficult to prove without Ellison’s testimony, and, at the very least, the Government’s evidence on these points would have been incomplete.” The lead prosecutor reiterated at Ellison’s sentencing hearing, “I cannot overstate the importance of Ms. Ellison's testimony in convicting Sam Bankman-Fried.” (Emphasis added.)
Cold, hard evidence vs. he-said-she-said
What’s particularly interesting is how much of Ellison’s “crucial” evidence is simply a case of her word against his.
Ellison and SBF’s convictions for fraud and conspiracy against lenders
In the words of Ellison’s lawyers, “Caroline identified [an] otherwise-anonymous spreadsheet…[which] became the centerpiece of the government’s case against Mr. Bankman-Fried for fraud and conspiracy against the lenders to Alameda Research.” The government adds, “Metadata also showed that Bankman-Fried reviewed the spreadsheet immediately before Ellison converted one of the fraudulent spreadsheet tabs into a balance sheet to send to an Alameda lender”. But evidence that SBF opened a spreadsheet before Ellison sent it to her lender hardly seems sufficient proof for two of his seven counts.
The accompanying testimony may therefore have been pivotal. Ellison told the jury—without evidence—that SBF “suggested that I should prepare some alternative ways of presenting the information…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” and that “Sam said that we should use alternative 7”.
SBF, on the other hand, testified to having no memory of looking at other versions or discussing their differences (and prosecutors blocked his attempt to answer the question: “Did the topic of limiting any of the materials sent to the lenders come up?”). Ellison also conceded on cross-examination that the lender had requested a “[f]aster, more informal” version of a balance sheet. Since all fast, informal summaries of a company’s financial situation necessarily omit some information, the defence’s version of events seems to have been: Ellison sought a quick second opinion about what information to prioritise for her rough-and-ready balance sheet, and SBF agreed that her choices looked reasonable.
Ellison and/or SBF’s decision to repay lenders
Ellison describes the relevant interaction as something close to an explicit order from SBF to repay lenders with customer funds: “He continued to direct me to repay loans….I understood that he was telling me to borrow money using our FTX line of credit to repay loans”.
However, in SBF’s retelling, he was simply agreeing with her decision to repay loans that had been called: "Caroline said that, given this update that Alameda was not in fact bankrupt…it probably made sense to go ahead and send back loans to lenders who were asking for loans back from Alameda, and I said that that sounded right to me".
(Wang’s report of the meeting is ambiguous: “[H]e turned to Caroline and said that Alameda can go ahead and return the borrows.")
Venture investments and the Binance buyback
As some commentators have noted, “For white collar fraud, it’s really hard to prove intent…The government just really made it clear Caroline Ellison made that job way easier”. In its 5K1 letter, the government lists two other examples of how “Caroline testified credibly and in detail about numerous communications she had with Mr. Bankman-Fried that definitively established his criminal [intent]...Bankman-Fried’s summer 2021 instruction for Alameda Research to use FTX.com customer funds to repurchase FTX equity from Binance [and]...Bankman-Fried’s fall 2021 decision to fund $3 billion in ‘venture’ investments with borrowed funds”.
Ellison contradicts both claims when recalling on the stand how she confessed to her staff “that Alameda had made billions of dollars of venture investments and had bought back FTX equity from Binance using open-term loans and that when the loans had been recalled, we had to use or we did use FTX customer funds to repay them, which had caused the shortfall” in customer funds (emphasis added).
Lying about fraud vs. lying about failure
As Alameda started collapsing in November 2022, Ellison wrote: “This is the best mood I've been in in like a year…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 trial, she tearfully described the all-hands meeting she led on November 9, 2022: “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…I never liked misleading my employees. I felt really bad about it, but I felt sort of trapped in the summer of 2022, because I was worried that if I revealed Alameda's actual financial situation to anyone, including our employees, that the news would get out and that people would withdraw their funds from FTX, causing Alameda and FTX to collapse. By the time of this all hands…meeting in November, it had already happened, so I felt free to be honest with employees at that point, as…I had wanted to before but felt like I couldn’t.”
Ellison is invariably portrayed here as having “forthrightly disclosed the fraud at the heart of FTX and Alameda Research” and “acknowledged her responsibility for those crimes without reservation”. But the private writings included with her sentencing submission offer an alternative explanation for her early November 2022 comments: she was simply ashamed of her own incompetence.
“I almost feel like I'm living a lie,” Ellison confesses to her journal in April 2022, “because people don't realize how little I'm working and what a shitty job I'm doing and am worried either that people will find out or that people already know and are judging me and think I'm terrible” (emphasis added). She describes herself “scrolling aimlessly through slack, etc” and wonders if part of the reason is that “trading is less good than last year”. In the summer of 2020, she wonders if she should “somehow get Sam to date me” to try to solve her emotional instability, because “maybe a lot of stuff traces back to feeling romantically rejected by Sam” and “[a] lot of what stresses me out about work is specifically failing Sam, or Sam’s disapproval.” “I feel despair and feel like there’s no hope of him ever loving me,” she continues, “then I just feel angry and hurt and want to lash out [and] this makes me want to be as pathetic as possible, so he’ll feel bad for hurting me”.
SBF’s protestation that Alameda’s undoing was largely the result of Ellison’s failure to hedge was not simply a post hoc attempt to recast his own criminality as Ellison’s incompetency. Ellison herself describes how SBF reminded her in August 2022 “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.” She goes on to admit, “I thought that I absolutely could and should have done things differently, and that I could have hedged more earlier in the year”, but she hadn’t because “[h]is suggested hedging strategy was we should have sold more stock market futures earlier in the year, and I thought that it wasn't necessarily clear, without hindsight, that [it] was a good idea.” More importantly, in one of the government’s own exhibits from September 2022, SBF complains to Wang and Singh about how Alameda “didn't hedge”, saying that it “cost more…than all the money Alameda has ever made or ever will make, and that's the kind of critical mistake we're likely to make if I'm not actually running the show here” (emphasis added).
Moreover, the straight-faced contention that Ellison “forthrightly disclosed the fraud” to her staff and “acknowledged her responsibility for those crimes without reservation” makes me wonder if anyone has actually read the all-hands transcript. There is no mention of criminality at this meeting and while Ellison apologises to her employees for the collapse of the company because it “really sucks for all of you guys”, she expresses no remorse for customers and lenders—who she expects will be repaid. When asked what Binance’s due diligence might uncover that might “kill the deal” to bail out FTX, she does not answer, “A multi-year multi-billion-dollar fraud directed by Sam,” she replies, “I like don't actually know, like it seems pretty, like I feel like FTX is like pretty like kinda straightforward business in a way, I mean, except for having like a big shortfall in user balances, except that [Binance] knows about that. So, yeah, I don't know. But, I mean, also, yeah I guess I understand [Binance’s] desire to do at least some amount of [due diligence]”. (At this point, the “shortfall” is public knowledge, but that does not imply fraud. Later that day, Binance says that because of its due diligence and new reports of criminal activity, it’s killing the deal.) Ellison even wraps up with a comment that the meeting had been “kind of fun.”
A few more tidbits:
The government argues that “Ellison’s testimony was credible for its consistency and her earnest demeanor on the stand”. But Michael Lewis challenges the authenticity of this demeanour, noting her transformation from “unafraid to speak her mind” around SBF pre-trial into “cowering underling” on the witness stand.
Nothing in Ellison’s journal entries and reference letters suggests that SBF encouraged her infatuation with him. On the contrary, there is evidence that she had a history of struggling to accept rejection—a friend of Ellison’s recounts how “there were a couple of [other] situations where she became involved in relationships that were not particularly good for her”, including one where her partner said that “he felt it was unlikely that he ever would” love her and yet, “she continued to date him for the better part of a year after that”.
Judge Kaplan justified a lengthy, “disabling” prison term for SBF in part by quoting Ellison on his political aspirations. But Ellison also once included in a list of things that make men more attractive: “low risk aversion” and “controlling most major world governments”. No pressure there, then.
So on the one hand we have the prevailing narrative—backed by the government and Ellison’s plea-deal testimony—of Ellison as a “front” who “further[ed] Bankman-Fried’s scheme and its concealment” and was “directed…to commit these crimes”. On the other, private comments and observations tracing a struggling but strong-minded CEO who refused her boyfriend’s pleas to hedge, and then was too embarrassed to admit how poorly she was running the company. (Frankly, it’s not clear to me if any of the accused thought Alameda’s borrowing from FTX was wrong prior to their pleas. And SBF, of course, has never wavered in affirming his innocence. As observed by his defence counsel, “none of the witnesses at this trial testified that Sam told them or directed them to violate the law or said or did anything that showed he thought he was violating the law”. Stories for another day.)
Either way, Ellison lied. A lot. Whether she’s been given a fair sentence for those lies is a judgement I leave to the reader.
A final thought
If Ellison’s testimony was critical to the case against SBF, was it also critical to the case against herself? She’d certainly like us to think so, casting herself as a downtrodden foot soldier, blindly obedient to a man she idolised in a misguided attempt to earn his love. But if it’s true that her efforts to save herself by sacrificing her partner backfired, then there’s a terrible irony in her being the daughter of an expert in the prisoner’s dilemma. Blockworks’ likening of the FTX saga to the parody show Jury Duty is holding up rather well.