Caroline Ellison’s Fear of Bank Run on FTX Deters Desired Step Down

Caroline Ellison, former CEO of Alameda Research, faced intense questioning during the trial of Sam Bankman-Fried, the founder of FTX. Prosecutors presented pieces of Ellison’s personal notes as evidence, revealing her struggles and desire to resign in the weeks and months leading up to the collapse of FTX.

Ellison testified for over ten hours this week, making her entrance through the front doors of the federal court in Manhattan accompanied by her attorneys. She explained that she had not seen Bankman-Fried since the November 2022 failure of FTX, and their communication had deteriorated even before that.

The decline in their relationship became evident in April 2022, when they ended their romantic involvement. Despite still living in the same luxurious apartment in the Bahamas, Ellison started avoiding meetings with Bankman-Fried. This, coupled with Alameda’s mounting liabilities with FTX, led her to contemplate leaving the company.

In a document presented as evidence during her cross-examination, Ellison expressed her dissatisfaction with her own and Sam Trabucco’s performance. She wrote to Bankman-Fried, “I feel like neither Trabucco nor I have been doing a great job of pushing on stuff.”

Bankman-Fried urged Ellison to stay, emphasizing that her departure could create damaging rumors about Alameda’s financial health, which could harm FTX’s credibility. Reluctantly, she remained as CEO.

Ellison’s journey with Alameda began in 2018 when she joined as a trader. By 2020, she was overseeing the majority of the company’s operations as Bankman-Fried focused on his newly launched crypto exchange, FTX. In August 2021, she was appointed co-CEO alongside Sam Trabucco, who later resigned a few months later, leaving her in sole charge.

During the trial, Ellison disclosed that she had initially been against the creation of FTX, but under Bankman-Fried’s influence, she became more ambitious. As CEO, she was responsible for managing Alameda’s crypto lenders.

In mid-2022, after the failure of the Terra ecosystem, Alameda’s open-term loans amounted to $1.3 billion. The subsequent market downturn resulted in reduced liquidity of crypto assets, leading Alameda’s lenders to demand loan repayments.

Bankman-Fried instructed Ellison to utilize Alameda’s line of credit with FTX to repay creditors. In essence, Alameda would use assets belonging to FTX customers to address the loan obligations. At the time, the line of credit with FTX stood at $13 billion.

As lenders continued to request loan repayments and scrutinize Alameda’s balance sheets, Bankman-Fried suggested Ellison explore “alternative means” of presenting the company’s financials. Consequently, Ellison created multiple versions of the balance sheet to deceive the creditors.

In early November, an alternative version of Alameda’s balance sheet leaked. At that time, Ellison was on vacation in Japan but was forced to travel to FTX Hong Kong’s office to handle the ensuing crisis for the company. Although the leaked balance sheet did not accurately reflect the true state of affairs, it was enough to spark rumors and trigger a bank run on FTX a few days later, ultimately exposing a shocking $8 billion gap between the companies.

Since December, Ellison has been cooperating with the Department of Justice. Soon, she will receive her sentence for the charges of seven counts of fraud and conspiracy to commit fraud.

Despite her admission of not doing a good job in leading Alameda Research and her desire to resign, Caroline Ellison’s testimony sheds light on the struggles faced by the trading firm and the events leading up to the collapse of FTX. This trial highlights the challenges and consequences surrounding the management of crypto companies in a volatile market.

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