Oct 12, 2023 - Economy

FTX trial: Alameda was using billions in customer funds well before the crisis, witness says

A drawing of a young woman testifying in court.

Caroline Ellison testifying in federal court in Manhattan on Thursday. Drawing: Brady Dale/Axios

Alameda Research, the defunct trading firm that launched the crypto exchange FTX, was using billions of dollars of customer funds even before 2022's interlocking solvency crisis at both firms.

Why it matters: Today's testimony from Alameda's former CEO directly contradicted past statements by the FTX founder, Sam Bankman-Fried, that FTX customer deposits are never reinvested.

  • Bankman-Fried is currently on trial in federal court for seven criminal counts of fraud and conspiracy.

What they're saying: "It was in the few billion dollar range," Caroline Ellison told defense counsel Mark Cohen, in response to a question about how much Alameda Research typically used its line of credit on FTX customer accounts prior to the firm's liquidity crisis last summer.

  • Ellison further illuminated Alameda's ongoing use of customer funds when she described how it provided market-making functions for new tokens listed on FTX.

Between the lines: Many of these tokens were small and new, with very little demand. However, if someone came to FTX looking to buy one, the exchange wanted to guarantee there was an active market and have an offer available.

  • One way that Alameda would help FTX meet demand for such new tokens was simply to borrow them from customers who held them on the exchange, using the line of credit, Ellison explained.

The intrigue: On cross-examination from the defense, Ellison confirmed that she and Ryan Salame, another FTX executive who has pled guilty in the case, provided accounting functions for FTX.

  • Ellison also confirmed that while Alameda had hired staff to provide accounting services, they couldn't convince them to stay. She did not explain the reasons why such staff members left, only that executives were left to take on those responsibilities.

Catch up fast: Bitcoin's price hit an all-time high in November 2021, and has been broadly falling ever since.

  • Twin shocks in the crypto market, coming in May and June 2022, threw Alameda and FTX into a liquidity crisis, as various lenders who had given Alameda open-term loans began demanding their money back.
  • To pay them back, Alameda staff allegedly borrowed many billions more than it was accustomed to using from FTX customers, who had no reason to believe that their assets might be used in that way.

Of note: It's been previously reported that Alameda's line of credit had a limit: $65 billion.

  • However, as Ellison testified on Tuesday, and again today, she never knew about any limit.

The scene: Ellison has pushed back against the defense repeatedly as it has asked her to confirm the exact dates of various meetings. She often confirms she remembers such meetings but can't remember the exact dates.

  • She also seems to have a slightly different tone in her answer to defense questions than the prosecution's, typically with a querulous tone in her voice, suggesting that she's happy to answer but can't see where counsel is going with most lines of inquiry.

Zoom out: The defense's line of inquiry through the morning largely concerned recapping various pieces of Ellison's testimony. It has also veered into her plea agreement with the government.

  • When the FBI visited her home in Nov. 2022, it confiscated three computers, one of which belonged to a new boyfriend who was visiting her at the time. He had also previously worked at one of SBF's companies.

What we're watching: The defense's cross examination is continuing Thursday afternoon.

Go deeper: FTX tried a lawyer, Thai prostitutes and finally a bribe to get frozen funds unlocked, witness says

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