Bankman-Fried associate admits to misuse of FTX customer funds

Caroline Ellison, a former close colleague of Sam Bankman-Fried, said she and the FTX founder hid the fact that they were using customer deposits from the cryptocurrency exchange to make “illiquid” investments that were later blamed for the company’s collapse in November.

Ellison, the former head of FTX’s trading affiliate Alameda Research who pleaded guilty to seven criminal charges on Monday, told a New York judge that from 2019 to 2022 the firm had access to “an unlimited line of credit on FTX.com” and that she “knew that it was wrong”, according to a transcript of the plea hearing made available on Friday.

“I understood that FTX executives had implemented special settings on Alameda’s FTX.com account to maintain negative balances in various fiat currencies and cryptocurrencies,” Ellison said at the hearing, just days before Bankman-Fried was extradited from the Bahamas to the US.

She added that she “understood that if Alameda’s FTX accounts had significant negative balances in any particular currency, it meant that Alameda was borrowing funds that FTX’s customers had deposited”.

These arrangements were concealed from both FTX customers and investors, Ellison said under oath. She has agreed to co-operate with the government in the case against Bankman-Fried, who is accused by US prosecutors of engineering “one of the biggest financial frauds in American history”.

The opaque relationship between Bahamas-based FTX and Alameda has played a central role in the demise of an exchange once valued at $32bn, which has spawned numerous legal probes and potential losses for millions of creditors including retail investors.

Ellison’s testimony on Monday afternoon was kept secret for days. Federal prosecutors had argued that revealing her plea might make it more difficult to convince Bankman-Fried, who has been charged with eight criminal counts, to allow himself to be brought back from the Bahamas to New York and be arraigned.

While the former billionaire’s lawyers had said Bankman-Fried would agree to be extradited, “there has been some hiccups in the Bahamian courtroom”, prosecutor Danielle Sassoon told the judge during the hearing on Monday.

“We think it could potentially thwart our law enforcement objectives to extradite him if Ms Ellison’s co-operation were disclosed at this time,” Sassoon argued.

Ellison’s plea agreement, as well as that of FTX co-founder Gary Wang, were announced by the US attorney’s office on Wednesday evening, once Bankman-Fried was en route to the US.

During the proceedings on Monday, the government said it had evidence from several witnesses, as well as Signal and Slack messages and financial records that would implicate Ellison and Wang.

Both are expected to testify against Sam Bankman-Fried, should the case against him go to trial. The FTX founder was released on bail on Thursday after agreeing a $250mn bond and consenting to be confined to his parents’ home in Palo Alto, California.

Prior to his arrest in the Bahamas last week, Bankman-Fried maintained that while he had “made a lot of mistakes” at FTX, he “didn’t knowingly commingle funds” on the exchange with Alameda’s. Bankman-Fried, who started FTX and Alameda, had long said the two groups operated independently.

Additional reporting by Nikou Asgari