Former Alameda Research CEO Caroline Ellison to Testify Tuesday in Sam Bankman-Fried Trial

Gary Wang, a former top lieutenant in Bankman-Fried’s empire, testified that Alameda had “special privileges” at FTX that allowed the hedge fund to spend $8 billion of exchange customers’ money.

AccessTimeIconOct 6, 2023 at 3:26 p.m. UTC
Updated Oct 9, 2023 at 3:45 p.m. UTC
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NEW YORK — Caroline Ellison, the former CEO of hedge fund Alameda Research and on-and-off girlfriend of Sam Bankman-Fried, is likely to be the next witness to testify on behalf of the government in its trial against the former crypto mogul, following former FTX executive Gary Wang.

After wrapping up court early Friday, the Department of Justice said FTX co-founder and former Chief Technology Officer Wang’s testimony would conclude on Tuesday and prosecutors expect to call Ellison to the stand next.

Ellison, like Wang, pleaded guilty to multiple fraud charges last December.

The court will not convene on Monday for Columbus Day (Indigenous People’s Day) and will resume on Tuesday at 9:30 a.m. ET.

Alameda’s role in FTX came under heavy scrutiny Friday, as Wang, a former top lieutenant in Bankman-Fried’s empire, testified that it had “special privileges” at FTX that allowed the crypto hedge fund to spend $8 billion of exchange customers’ money.

Taking the stand in an ill-fitting black suit, Wang, who co-founded both companies with Bankman-Fried, said that in July 2019, shortly after the exchange opened for business, Bankman-Fried directed him to write code that would let Alameda’s FTX account balance fall below zero. It was a secret feature that no other customer of the crypto exchange had, the insider-turned-government witness said.

“Sam told me to make sure Alameda’s accounts would never get liquidated on FTX,” Wang said.

Wang is the first of at least three witnesses from Bankman-Fried’s inner circle who pled guilty to financial crimes and are now testifying against the alleged fraudster in his criminal trial. Ellison will be the second.

Once known as FTX’s quiet chief technology officer, Wang in his testimony introduced the jurors to the byzantine financial arrangements that the government alleges enabled the two companies to steal billions of dollars from FTX customers.

Months after the crypto exchange FTX was founded in 2019, Wang said Friday, he wrote “allow negative equals zero” code specified to Alameda accounts. He said Bankman-Fried ordered the code so the hedge fund could spend money on FTT, the token created by FTX.

“Sam said that he wanted to pay for FTT-related expenses from Alameda accounts," Wang said. But Alameda’s spending grew broader — and never stopped, he said.

Importantly, Wang testified that around the time Alameda owed FTX $11 billion or so, FTX was generating only around $1.5 billion in revenue

Initially, Alameda’s “special privileges” were only supposed to be able to take as much money as FTX’s revenue allowed for, Wang said. When Wang saw that it exceeded that amount, he was “surprised” and went to speak with Bankman-Fried about it multiple times, Wang testified.

“I trusted his judgment,” Wang recalled.

When asked by the prosecutor if he thought at the time that the remaining funds came from FTX customers, Wang said no.

“Why?” the prosecutor asked.

“The money belonged to the customers and they didn’t give us permission to use their funds for other things,” he said.

Prior to a late-morning break, the prosecutor walked Wang through a series of questions about FTX’s “backstop fund,” the emergency fund the exchange supposedly had.

FTX displayed a dollar amount for the backstop fund on its site, but this figure was not based on anything real, Wang testified.

The actual amount in the insurance fund was lower than what was displayed, Wang said. The display figure was calculated through a formula that had no basis in reality, he said.

The prosecutor touched on the line of credit that Wang had mentioned in his earlier testimony on Thursday.

Wang increased Alameda’s line of credit multiple times during his tenure at FTX at Bankman-Fried’s behest, he said, because the market maker needed to draw on that line to continue placing its orders.

Initially, the line of credit limit was $1 billion, Wang said. “We picked a number so high it would never be hit,” he said, sparking laughter from the gallery.

Eventually, the limit grew to $65 billion. The move guaranteed Alameda had a virtually unlimited credit on FTX.

The prosecutor asked Wang what Bankman-Fried said about the figure. “He said that he’s fine with that," Wang said.

Later, the prosecutor walked Wang through a series of questions about a “Korean friend” Bankman-Fried referred to, pulling up a screenshot of a group of accounts tied to the user ID “seyouncharles.” One of the email addresses displayed belonged to an Alameda sub-account, Wang said.

The account had a negative $8 billion balance, which was not included in the main Alameda accounting so it wouldn’t be included in interest payment calculations, Wang said.

Inside the Courtroom

Bankman-Fried’s parents were in court again on Friday. His mother, clad in a black suit, sat stony-faced on the right side of the courtroom, flexing her jaw and listening intently to the prosecutor's line of questioning. During the testimony, her eyes flitted from her son, to the witness, and then to her lap, where she scribbled notes to her husband. Wearing a gray suit, the father maintained a quiet composure during the hearing.

Sam Bankman-Fried's parents in court (Sketch by Helene Braunn for CoinDesk)
Sam Bankman-Fried's parents in court (Sketch by Helene Braunn for CoinDesk)

In the jury box, the mood was largely subdued. Some of the 12 jurors and six alternates scribbled in their notepads and nodded on occasion as Wang spoke while others reclined in their seats listening to the testimony. One juror looked bewildered as a government attorney and Wang traded crypto jargon.

Defense counsel Mark Cohen told the judge at the beginning of Friday’s proceedings that one juror shared an elevator ride with one of Bankman-Fried's lawyers. The judge reassured jurors that if they said “good morning” to any witnesses or lawyers in this case, they shouldn’t feel offended if they didn't receive a response.

Nikhilesh De contributed reporting.

UPDATE (Oct. 10, 2023, 21:10 UTC): Adds details throughout from ongoing trial.

Edited by Marc Hochstein.

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