Sam Bankman-Fried’s ex-girlfriend stunningly confessed during a secret court proceeding that she knew “it was wrong” to take part in his alleged fraud scheme, according to a transcript made public Friday.
“I am truly sorry for what I did,” Caroline Ellison said. “I knew that it was wrong.”
Ellison, 28, pleaded guilty Monday to federal fraud charges in connection with her role as the CEO of the Alameda Research hedge fund, which allegedly received billions of dollars from Bankman-Fried’s now-bankrupt FTX cryptocurrency exchange.
Ellison admitted in Manhattan federal court that she “understood that many FTX customers invested in crypto derivatives and that most FTX customers did not expect that FTX would lend out their digital asset holdings and fiat currency deposits to Alameda in this fashion.”
FTX co-founder Gary Wang also pleaded guilty in the $8 billion collapse of FTX, and both he and Ellison are cooperating with the feds, Manhattan US Attorney Damian Williams revealed Wednesday.
Ellison pleaded guilty Monday to federal fraud charges. Twitter / @carolinecapital
FTX founder Sam Bankman-Fried was released on $250 million bond. AFP via Getty Images
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Gary Wang also pleaded guilty.
FTX was founded in 2019. Marta Lavandier/AP
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Bankman-Fried, 30, was extradited from the Bahamas Wednesday to face an eight-count indictment that carries a maximum 115 years in prison.
He was released on $250 million bond to house arrest at his parents’ $4 million home in Palo Alto, Calif., near Stanford University, where they’re both law professors.
Ellison’s plea agreement says that she faces up to 110 years in prison and that prosecutors “will not recommend any specific sentence” in exchange for her cooperation.
But it also says that if she provides “substantial assistance,” they will submit a letter asking for a punishment that’s less harsh than called for by federal sentencing guidelines.
Former Brooklyn federal prosecutor Moira Penza said it was “too early” to say how much time Ellison would have to serve in prison but noted that “cooperating early was the best thing she could have done to seriously reduce her possible sentence.”
“Ms. Ellison was in the door as early as she could be and didn’t even need to be indicted. She is signaling at every opportunity that she is taking responsibility and is truly remorseful,” Penza said.
Penza also noted that it’s “not unheard of for testifying cooperators — even ones facing as long a sentence as Ms. Ellison — to receive probation rather than any prison term.”
Defense lawyer Ira Sorkin — whose former client, the late Bernie Madoff, got slapped with a 150-year sentence for his epic Ponzi scheme — declined to guess what would happen to Ellison.
“To predict what she will get at this stage is impossible,” he said.
apologized in court this week as she pleaded guilty to fraud and other offenses, telling a judge that she and others conspired to steal billions of dollars from customers of the doomed crypto exchange while misleading investors and lenders.
“I am truly sorry for what I did,” Ms. Ellison, the former chief executive of Mr. Bankman-Fried’s crypto-trading firm, Alameda Research, said in a New York federal court, according to a transcript of the hearing made available Friday. “I knew that it was wrong.”
Ms. Ellison, 28 years old, and former FTX chief technology officer
Gary Wang,
29, pleaded guilty Monday during separate hearings in sealed courtrooms. Both agreed to cooperate with the government’s investigation in exchange for the prospect of lighter sentences.
Ms. Ellison, a former romantic partner of Mr. Bankman-Fried, pleaded guilty to seven criminal counts, including fraud, conspiracy and money laundering. During her hearing, she admitted to conspiring to use billions of dollars from FTX customer accounts to repay loans Alameda had taken out to make risky investments.
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FTX executives had enacted special settings that granted Alameda access to an unlimited line of credit without having to post collateral, pay interest on negative balances or be subject to margin calls, she said.
“I also understood that many FTX customers invested in crypto derivatives and that most FTX customers did not expect that FTX would lend out their digital asset holdings and fiat currency deposits to Alameda in this fashion,” she said.
Ms. Ellison also said she and Mr. Bankman-Fried worked with others to conceal the arrangement from lenders, including by hiding on quarterly balance sheets the extent of Alameda’s borrowing and the billions of dollars in loans that the firm had made to FTX executives and associates. Mr. Bankman-Fried was among the executives who received loans from Alameda, she said.
Under questioning from the judge, Ms. Ellison said she knew what she was doing was illegal.
She said that since FTX’s implosion, she has worked hard to assist in the recovery of customers’ assets and aid the government’s investigation.
At the hearing, U.S. District Judge
Ronnie Abrams
granted the request of federal prosecutors to temporarily seal all documents connected to Ms. Ellison’s plea agreement. At the time, Mr. Bankman-Fried was in a jail in the Bahamas after the Justice Department requested local police arrest him, and he had not yet formally consented to his transfer to U.S. custody.
“We’re still expecting extradition soon, but given that he has not yet entered his consent, we think it could potentially thwart our law enforcement objectives to extradite him if Ms. Ellison’s cooperation were disclosed at this time,” Assistant U.S. Attorney
Danielle Sassoon
told Judge Abrams.
A lawyer for Ms. Ellison declined to comment. Ms. Ellison was ordered released on $250,000 bond at her plea hearing. A spokesman for the U.S. attorney’s office in Manhattan declined to comment.
John J. Ray III, the new chief executive of FTX, testified in front of a House committee Tuesday on the collapse of the crypto exchange. His testimony came less than a day after the company founder, Sam Bankman-Fried, was arrested in the Bahamas. Photo: Al Drago/Bloomberg News
Mr. Wang pleaded guilty in front of the same judge. He told Judge Abrams he knew what he was doing was illegal and wrong. “As part of my employment at FTX, I was directed to and agreed to make certain changes to the platform’s code,” he said, adding that he executed the changes knowing they would give Alameda Research special privileges on the FTX platform.
A lawyer for Mr. Wang declined to comment. He has previously said that Mr. Wang takes his responsibilities as a cooperating witness seriously.
The Justice Department charged Mr. Bankman-Fried earlier this month with eight counts of fraud and conspiracy connected to the implosion of his company. He was released from custody on a $250 million bond on Thursday after making his first court appearance in New York following his extradition from the Bahamas. A federal magistrate judge set strict restrictions on Mr. Bankman-Fried, including ordering him to stay in his parents’ Palo Alto, Calif., home and be under electronic monitoring.
Mr. Bankman-Fried has said he made mistakes that contributed to FTX’s demise, but he has denied engaging in fraud.
Write to Corinne Ramey at corinne.ramey@wsj.com and James Fanelli at james.fanelli@wsj.com
oversaw one of the biggest financial frauds in American history, a top federal prosecutor said in charging that the former chief executive stole billions of dollars from the crypto exchange’s customers while misleading investors and lenders.
An indictment by the U.S. attorney’s office for the Southern District of New York, unsealed Tuesday, charges Mr. Bankman-Fried with eight counts of fraud. Prosecutors allege that he took FTX.com customers’ money to pay the expenses and debts of Alameda Research, an affiliated trading firm. Mr. Bankman-Fried is charged as well with conspiring to defraud the U.S. and violate campaign-finance rules by making illegal political contributions.
Damian Williams,
the U.S. attorney for the Southern District of New York, said he authorized the charges against Mr. Bankman-Fried last Wednesday and a grand jury voted on the indictment Friday.
“This investigation is very much ongoing, and it is moving very quickly,” Mr. Williams said at a press conference in Manhattan on Tuesday. “While this is our first public announcement, it will not be our last.”
John J. Ray III, the new chief executive of FTX, testified in front of a House committee Tuesday on the collapse of the crypto exchange. Photo: Nathan Howard/Getty Images
Separately, John J. Ray III, the new chief executive of FTX, said at a congressional hearing Tuesday that FTX incurred losses in excess of $7 billion. Mr. Ray, who oversaw the Enron Corp. bankruptcy early in the 2000s decade, said funds were taken from FTX and Alameda, an affiliated trading firm that incurred trading losses.
Mr. Ray described Enron as having been brought down by sophisticated people whose machinations aimed to keep transactions secret. FTX presents as “old-fashioned embezzlement,” Mr. Ray said. “It’s taking money from customers and using it for your own purpose.”
Also Tuesday, the Securities and Exchange Commission alleged in a civil lawsuit that Mr. Bankman-Fried diverted customer funds from the start of FTX to support Alameda and to make venture investments, real-estate purchases and political donations. The Commodity Futures Trading Commission filed a lawsuit Tuesday linking his allegedly fraudulent conduct at Alameda and FTX to markets that the CFTC regulates.
“
Sam Bankman-Fried
built a house of cards on a foundation of deception while telling investors that it was one of the safest buildings in crypto,” SEC Chair
Gary Gensler
said.
The charges are the latest twist in a saga that has rattled the world of cryptocurrencies, a largely unregulated market that boomed during the pandemic but has been hammered this year by rising interest rates and the failure of several significant industry players.
FTX, one of the largest crypto exchanges in the world, filed for bankruptcy last month after the firm ran out of cash and a merger with rival Binance collapsed. The firm’s failure marked a sudden fall from grace for Mr. Bankman-Fried, who portrayed FTX as a safer crypto exchange to use and cast himself as an ally of regulation.
In interviews since the filing, Mr. Bankman-Fried said he bore responsibility for FTX’s collapse but denied he committed any fraud.
Mark Cohen,
a lawyer for Mr. Bankman-Fried, said Tuesday that his client “is reviewing the charges with his legal team and considering all of his legal options.”
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Mr. Bankman-Fried, 30 years old, was arrested Monday in the Bahamas. He appeared in court Tuesday in Nassau. He was denied bail and has been remanded to jail until Feb. 8, according to a person familiar with the matter.
A U.S. court official said that while the case had been assigned to a federal judge in Manhattan, there was no timing yet for Mr. Bankman-Fried’s extradition.
The tales of Mr. Bankman-Fried’s alleged misdeeds resonated with crypto customers around the world, even those who haven’t suffered significant losses as various firms by turns suspended withdrawals and collapsed.
Vasco Tagachi, a 42-year-old Portuguese-Sri Lankan trader based in China, said he felt a sigh of relief after learning of Mr. Bankman-Fried’s arrest. He said he had $57,423 in an FTX account this fall but was able to withdraw almost all of it just before the firm stopped honoring withdrawal requests.
“I had a little bit of tears in my eyes hearing that,” he said.
Prosecutors allege that from 2019 through November 2022, Mr. Bankman-Fried conspired with unnamed individuals to defraud customers and lenders. He provided false and misleading information to lenders on the financial condition of Alameda, according to the indictment.
Sam Bankman-Fried was arrested in the Bahamas on Monday, a day before he was expected to testify on the sudden collapse of FTX before the House Committee on Financial Services. Illustration: Jacob Reynolds
While the 14-page indictment was light on detailed allegations, it says that on Sept. 18, 2022, Mr. Bankman-Fried caused an email to be sent to an FTX investor in New York that contained false information about FTX’s financial condition. In June 2022, the indictment says, Mr. Bankman-Fried and others misappropriated FTX.com customer deposits to satisfy the loan obligations of Alameda.
Mr. Bankman-Fried is also accused of defrauding the Federal Election Commission starting in 2020 by conspiring with others to make illegal contributions to candidates and political committees in the names of other people.
He and his associates contributed more than $70 million to election campaigns in recent years, The Wall Street Journal previously reported. He personally made $40 million in donations ahead of the 2022 midterm elections, most of which went to Democrats and liberal-leaning groups.
Mr. Ray, the FTX CEO, said FTX is investigating whether any loans taken by FTX executives were improperly used for campaign contributions.
Mr. Ray added that tracing fund flows from FTX to executives and third parties was difficult because of the lack of a paper trail for many corporate transactions at FTX.
“We’re dealing with a paperless bankruptcy,” he said. “It makes it very difficult to trace and track assets.”
The CFTC’s complaint contains a detailed discussion of events at Alameda and FTX and argues that the agency, generally less visible to the public than the SEC, also has jurisdiction over the case. While the CFTC regulates U.S. derivatives markets, it can go after fraud that affects some commodity markets.
Besides giving Alameda access to its customer deposits, FTX granted the crypto hedge fund controlled by Mr. Bankman-Fried a series of trading-execution privileges that provided it an edge against other traders on the platform, the CFTC lawsuit alleges.
The CFTC said that while institutional customers had their orders routed through the FTX system, Alameda was able “to bypass certain portions of the system and gain faster access.” It resulted in Alameda’s orders being received by FTX several milliseconds faster than those of other institutional clients.
The lawsuit also alleges that Alameda wasn’t subject to certain automated verification processes, including on whether it had available funds before executing a transaction, giving it further advantage on the speed of its trades.
The edge wasn’t enough to keep Mr. Bankman-Fried from thinking about shutting down Alameda in September, according to the CFTC complaint.
In a document titled “We came, we saw, we researched,” Mr. Bankman-Fried laid out reasons for shutting down Alameda, according to the CFTC lawsuit. Chief among them: Alameda wasn’t making enough money to justify its existence, he wrote.
The CFTC said the statements contradicted what Mr. Bankman-Fried and Alameda were saying publicly at the time.
Tuesday’s congressional hearing was the first public appearance for Mr. Ray on FTX’s bankruptcy. Mr. Bankman-Fried had been scheduled to appear virtually at the same hearing, before he was arrested in the Bahamas at the request of the U.S. government. Bahamian police have said that they would keep him in custody and that they are awaiting an extradition order from U.S. authorities.
“The operation of Alameda really depended, based on the way it was operated, on the use of customer funds,” Mr. Ray said, responding to questions from members of Congress at the hearing. “There were virtually no internal controls…whatsoever.”
He described numerous loans totaling billions of dollars taken out by Mr. Bankman-Fried from Alameda.
“We have no information at this time as to what purpose or use of those funds were,” Mr. Ray added. He said Mr. Bankman-Fried had signed as the issuer and recipient for some of the loans.
Mr. Ray pushed back against recent statements made by Mr. Bankman-Fried that he had little to no involvement in the management of Alameda after passing control of the company to
Caroline Ellison
and
Sam Trabucco,
as well as Mr. Bankman-Fried’s statements that customer funds were passed to Alameda because of an accounting error.
“I don’t find those statements to be credible,” Mr. Ray said.
The Justice Department’s indictment of Mr. Bankman-Fried includes an array of charges with few supporting details, a tactic that could give federal prosecutors flexibility in navigating the rules involving extradition.
The charges against Mr. Bankman-Fried run the gamut from wire fraud to securities fraud conspiracy to conspiring to launder money and conspiring to break campaign-finance laws.
The statutes charged, with the exception of the campaign-finance offense, are enormously broad, said Rebecca Mermelstein, a former federal prosecutor who is now at O’Melveny & Myers LLP.
“By not being superspecific, you protect yourself later against an argument that charges relating to different criminal conduct are being added,” she said.
The arrest of Mr. Bankman-Fried is the latest case to highlight prosecutors’ push to bring white-collar cases to justice faster.
Deputy U.S. Attorney General Lisa Monaco said in a September speech that making prosecutors and companies feel that they were “on the clock” in these cases was a key priority for the department.
FTX founder Sam Bankman-Fried sat down with The Wall Street Journal to discuss what happened to the billions of dollars deposited by the exchange’s customers. Photo: Kenny Wassus/The Wall Street Journal
“We need to do more and move faster,” she said. “In individual prosecutions, speed is of the essence.”
Former federal prosecutors say that high-profile financial cases with lots of victims can increase the pressure on authorities to bring cases more quickly.
“Appearances matter when it comes to criminal justice,” said Mark Chutkow, a former federal prosecutor who is currently head of government investigations and corporate compliance at Dykema Gossett PLLC.
If Mr. Bankman-Fried remains in the Bahamas while the details of his potential extradition to the U.S. are worked out, there is only one prison there: the Bahamas Department of Correctional Services, commonly known as Fox Hill Prison.
Prison inmates reported removing human waste by buckets and developing bed sores from lying on the bare ground, according to a 2021 human-rights report on the Bahamas by the U.S. State Department. Cells were infested with rats, maggots and insects, the report said.
Inmates are supposed to get an hour every day outside for exercise. Because of staff shortages and overcrowding, there are times when inmates will only get 30 minutes a week, said Romona Farquharson, an attorney in the Bahamas.
The prison has different sections that separate those serving terms for violent crimes, for instance, from those who aren’t. Because of overcrowding, there have been instances in which inmates awaiting trial for minor crimes have been sent to the maximum-security facility, said Ms. Farquharson.
“I think they’ve got to be careful not to have him in really rough areas in the prison,” she said.
—Angel Au-Yeung, Ben Foldy and Hannah Miaocontributed to this article.
Write to Corinne Ramey at corinne.ramey@wsj.com, James Fanelli at james.fanelli@wsj.com, Dave Michaels at dave.michaels@wsj.com, Alexander Saeedy at alexander.saeedy@wsj.com and Vicky Ge Huang at vicky.huang@wsj.com
FTX CEO Sam Bankman-Fried appeared at a Senate committee hearing earlier this year on cryptocurrencies.
Photo:
Sarah Silbiger/Bloomberg News
Alameda Research’s chief executive and senior FTX officials knew that FTX had lent its customers’ money to Alameda to help it meet its liabilities, according to people familiar with the matter.
Alameda’s troubles helped lead to the bankruptcy of FTX, the crypto exchange founded by
Sam Bankman-Fried.
Alameda is a trading firm also founded and owned by Mr. Bankman-Fried.
In a video meeting with Alameda employees late Wednesday Hong Kong time, Alameda CEO
Caroline Ellison
said that she, Mr. Bankman-Fried and two other FTX executives,
Nishad Singh
and
Gary Wang,
were aware of the decision to send customer funds to Alameda, according to people familiar with the video. Mr. Singh was FTX’s director of engineering and a former Facebook employee. Mr. Wang, who previously worked at Google, was the chief technology officer of FTX and co-founded the exchange with Mr. Bankman-Fried.
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Alameda faced a barrage of demands from lenders after crypto hedge fund Three Arrows Capital collapsed in June, creating losses for crypto brokers such as
Voyager Digital Ltd.
, the people said.
Ms. Ellison said on the call that FTX used customer money to help Alameda meet its liabilities, the people said.
On Friday, FTX, Alameda, FTX US and other FTX affiliates filed for bankruptcy protection.
Bankruptcy means that it could be a long time before individual investors and others owed their funds are able to potentially recover any of them, if ever.
Ms. Ellison didn’t return a phone message and an email seeking comment. Messrs. Singh and Wang didn’t respond to multiple messages seeking comment. Ryne Miller, FTX US’s chief legal officer, declined to comment.
Cryptocurrency platform FTX filed for chapter 11 on Friday and CEO Sam Bankman-Fried resigned. WSJ’s Vicky Ge Huang explains what happened to the company and what this could mean for investors. Photo: Olivier Douliery/AFP
Write to Dave Michaels at dave.michaels@wsj.com, Elaine Yu at elaine.yu@wsj.com and Caitlin Ostroff at caitlin.ostroff@wsj.com
