Caroline Ellison: Covert audio reveals significant disclosures

The ongoing trial of former FTX CEO Sam Bankman-Fried has revealed a series of significant disclosures through testimonies from former prominent executives of FTX and Alameda Research.

The latest court session on Oct. 12 featured former Alameda CEO Caroline Ellison testifying for the third consecutive day, after which the jury was shown a recording of a meeting she conducted with Alameda staff on Nov. 9, 2022, just days prior to the downfall of the FTX empire.

This meeting, which took place in Hong Kong and included nearly half of Alameda’s workforce, marked a pivotal moment where Ellison openly discussed the ongoing situation with the crypto exchange with her colleagues. This revelation was accompanied by significant disclosures regarding Alameda’s financial dealings with FTX. Cointelegraph has obtained the confidential recording and compiled a list of four notable points it disclosed.

Alameda’s poor investments triggered the financial crisis at FTX

The first and most critical disclosure emerged early in the meeting when Ellison stated that Alameda had borrowed funds from FTX for a year. She acknowledged that Alameda had made various illiquid investments using the borrowed capital.

As a result of the market decline, Alameda’s loan positions were called in, leading to a deficit in FTX’s balance sheet. Here’s a segment from the conversation:

“Most of Alameda’s loans got called in in order to meet those loan recalls. We ended up borrowing a bunch of funds on FTX, which led to FTX having a shortfall in user funds. And so with the, once there started being like FUD about this and users started withdrawing funds.”

Ellison indicated that Alameda’s poor loans instigated market anxiety surrounding FTX, prompting users to withdraw their funds. Subsequently, FTX halted withdrawals to manage the situation, and the exchange collapsed within days.

FTX intended to raise additional funds to reimburse users

When one of the employees present at the meeting inquired about how FTX planned to repay its customers, Ellison stated that the crypto exchange was looking to raise more funds to address the shortfall.

“Basically, FTX is trying to raise in order to do this [compensate users], but yeah, after the crash, no one wanted to invest. I don’t know, obviously, in retrospect, the plan of waiting around for several months and like for the market environment to get better and then raise.”

During the court session on Thursday, Christian Drappi, a former software engineer at Alameda who attended the meeting, expressed to the court that Ellison’s response regarding repaying customers seemed troubling to him, as he was unaware of any situation where investors had contributed to making customers whole due to the company’s poor financial choices.

The nervous laughter

As the confidential recording was played in court, the former Alameda employee also noted that Ellison had laughed during the meeting. The employee suggested this was Ellison’s “nervous laughter,” a behavior she often exhibited when under pressure.

Related: Changpeng Zhao’s tweet ‘contributed’ to collapse of FTX, claims Caroline Ellison

When a staff member at the meeting asked Ellison whose idea it was to cover Alameda’s loan losses with FTX customer funds, she replied, “Um, Sam, I guess,” followed by a giggle.

Alameda consistently had access to users’ funds at FTX

Another staff member questioned the backdoor access of Alameda to FTX and inquired how long Alameda had been utilizing FTX customers’ funds to cover gaps in its balance sheet. Ellison replied, “FTX basically always allowed Alameda to borrow user funds, as far as I know.”

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