Caroline Ellison, whom many people call “Lady Crypto,” was the CEO of Alameda Research, which was the FTX group’s trading company.
Alameda Research apparently was at the heart of FTX’s problems, because although the exchange’s fund management was somewhat problematic, it was Alameda Research’s losses that apparently triggered the collapse.
The faults of Lady Crypto in the collapse of FTX
Today the US Attorney’s Office for the Southern District of New York (SDNY) informed via Twitter that Caroline Ellison, along with Gary Wang, pleaded guilty.
Statement of U.S. Attorney Damian Williams on U.S. v. Samuel Bankman-Fried, Caroline Ellison, and Gary Wang pic.twitter.com/u1y4cs3Koz
— US Attorney SDNY (@SDNYnews) December 22, 2022
The charge was fraud, and Ellison apparently decided to spill the beans and cooperate with the US Department of Justice investigation. It appears that by plea bargaining in this way she avoided a potential sentence of 110 years in prison.
Prosecutor Damian Williams revealed that SDNY has filed charges against Caroline Ellison and Gary Wang in connection with their roles in the fraud that contributed to the collapse of FTX, and that both Ellison and Wang have pleaded guilty and are cooperating with SDNY.
Williams also added that this is unlikely to be the last major development in the affair because the investigation is still ongoing and is evolving very rapidly.
He also added a sentence that apparently seems aimed at Sam Bankman-Fried (SBF), as if to persuade him to plead guilty like his accomplices.
The SEC had previously accused Ellison and Wang of setting up a multi-year scheme to defraud FTX stock investors, and other violations of the Securities Act.
Thus, the charge Ellison pleaded guilty to is that of fraud.
Williams did not describe the details of this fraud, but evidently refers to the way FTX and Alameda Research were run.
Beyond that, however, there are other charges looming over her, coming not from the SDNY but from the SEC. According to the SEC, Ellison, under the direction of SBF, allegedly promoted a scheme to manipulate the price of the FTX token (FTT). The manipulation was allegedly conducted by buying large quantities of FTT in the market to support its price.
The scam and the FTT token
The FTX crypto exchange was created in 2019, and its FTT token landed on the markets in July of that year at a price of about $1.6.
Until November 2020 its price had risen slowly to above $4, but with the start of the last major bull run in the crypto markets it soared to nearly $60 in May 2021.
After an initial slump below $23, by July it had begun to rise again until it hit an all-time high of $84 in September of that year.
Then the price began to fall, first reaching $35 in January this year, and then again at $23 in June.
In early November it was still $26, but at that point, it began to collapse.
The collapse began when Binance’s co-founder and CEO, Changpeng CZ Zhao, publicly stated that he wanted to sell all of his FTT tokens.
At first, Caroline Ellison had responded to CZ that Alameda Research would purchase all of Binance’s FTT tokens at a price of $22, but as of 8 November, the market price fell below this threshold.
Panic ensued at that point, and within a single day, the price plummeted to $4.
On 10 November, which was the day of FTX’s collapse, the price had fallen to $2, and on 14 November it had fallen to $1.3.
Just two days ago it also fell below $1, and yesterday it recorded its lowest price ever at $0.85. However, it could fall further.
Compared to the September 2021 highs, the cumulative loss is 99%, while since the placement it is 49%.
Other charges
Even the CFTC is charging Caroline Ellison, Gary Wang and SBF, specifically with fraud and misrepresentation in connection with the sale of digital assets in interstate commerce.
Specifically, Gary Wang is accused of creating FTX’s software code that then allowed Alameda to misappropriate exchange customers’ funds, and thus Ellison to misappropriate them for use in financing Alameda’s trading activities.
The key point appears to be precisely the unauthorized use of the funds that FTX customers had deposited on the exchange.
Indeed, it was not clear to those who deposited their funds on FTX that the company would use them to finance its own activities as if they were its own money.
At this point, any attempt to convince users to deposit their own funds on FTX could be considered part of an outright scam, since customers instead were told that they could withdraw their funds at any time, implying that the exchange was storing them in cash so that they could release them at any time.
In fact, the problem exploded on 10 November when FTX actually had to stop withdrawals. At that point, it was clear that it no longer had customer funds in its cashbox, so much so that it was later discovered that it had actually spent them to finance its own activities.
SBF’s position
Now that Ellison and Wang are spilling the beans, it appears that it will be very difficult for SBF to continue to plead innocence.
Indeed, SBF is also facing more than 100 years in prison, so it is not surprising that prosecutor Williams is trying to throw him some sort of life preserver to convince him to plead guilty, and thus drastically reduce his sentence.
Sam Bankman-Fried is the co-founder and former CEO of SBF, i.e., the central figure in this affair and the FTX Group. A few days ago he was arrested in the Bahamas, where the company was headquartered, and as of today has been extradited to the United States.
At first, he had tried to oppose the extradition but then became convinced that perhaps it was somehow convenient to go along with US demands.
SBF is a US citizen, as are most of the people who were defrauded. So although the company’s legal and operational headquarters were in the Bahamas, it is quite logical that the trial would be held in the US.
It should also be said that in his home country, SBF can perhaps still count on several friendships, so much so that apparently the new detention regime would already be much softer than the harsh conditions he had to endure in the Bahamian prison.
Lady Crypto and the connection to SBF and the FTX empire
While SBF is set to remain in jail for quite a while longer, Caroline Ellison on the other hand apparently could be released on a $250,000 bail, provided she does not leave the United States.
The fact that by plea bargaining she has avoided a potential 110-year prison sentence does not mean, however, that she will not be incarcerated. The sentence will depend on the outcome of the trial.
It appears that with the plea deal she has avoided as many as seven counts, while she would still be prosecuted by the SDNY only for criminal tax violations. It is unclear, however, whether this deal would also apply to the SEC and CFTC charges, but given that it is a deal only with the SDNY it does not appear that it would hold up with respect to other authorities as well.
