Caroline Ellison claims that Sam Bankman-Fried pushed her into crime

Former Alameda Research CEO Caroline Ellison has sued Sam Bankman-Fried, former CEO of FTX, over a series of financial crimes.

The lawsuit stems from activities conducted by cryptocurrency trading platforms FTX and Alameda Research, which suffered a major crash in November 2022.

Caroline Ellison testifies against Sam Bankman-Fried.

Caroline Ellison, who had a personal relationship with Bankman-Fried, testified in a Manhattan court Tuesday that she was ordered to divert money from FTX clients to settle Alameda Research's debts.

About $14 billion was allegedly misdirected, an allegation that Bankman-Fried set up a system that allowed such financial misconduct.

“Sam instructed me to commit these crimes,” she said.

Ellison highlighted a concerted effort to mislead creditors by providing fraudulent accounting records. The aim was to make the loss of Alameda seem less dangerous than it really was. This statement was part of her 10-minute testimony.

Read more: Who is FTX's new CEO, John J. Ray III?

The indictment follows similar testimony from Gary Wang, the co-founder of FTX, who cooperated with prosecutors. Both Ellison and Wang face charges including money laundering, conspiracy to defraud and money laundering.

Bankman-Fried, meanwhile, faces seven federal charges that carry a maximum sentence of life in prison if convicted. The trial will continue in March 2024, with further charges expected.

SEC accuses banker of fraud

The US Securities and Exchange Commission (SEC) added that at the direction of Bankman-Fried, Ellison manipulated the value of digital tokens issued by FTX. Alameda then used the altcoin as collateral for undisclosed loans from FTX.

This alleged scam falsely displayed higher collateral, making FTX appear financially sounder than it actually was.

“FTT – an illegal crypto-asset security issued by FTX and provided at no cost to Alameda. Ellison, acting at the direction of Bankman-Fried, engaged in the automatic purchase of FTT tokens on various platforms to increase the value of those tokens and to increase the value of Alameda's collateral, thereby giving Alameda more leverage than external lenders.” “Allows him to borrow money. Greater risk to creditors and FTX's investors and customers, all in furtherance of the scheme,” the court documents read.

While an icon in the industry, FTX began a rapid descent after exposing its tight financial ties to Alameda. The subsequent events caused a significant drop in Alameda's digital token holdings. This was followed by panic among FTX customers leading to its termination, followed by bankruptcy filings for both companies.

Read more: FTX Collapse Explained: How the SBF Empire Fell

The ongoing trial, combined with testimony from Ellison and other executives, will reveal the fraud that led to FTX's collapse. This is a stark reminder of the regulatory and ethical scrutiny facing the crypto industry.