Caroline Ellison was considered a prodigy in the crypto world who loves risk. After allegations of fraud against the FTX leadership, she decided to cooperate with the American judicial authorities.
The 28-year-old Caroline Ellison loves the risk – apparently too much.
Barely a week after Sam Bankman-Fried, fallen crypto king and founder of insolvent exchange FTX, was arrested in the Bahamas, the time has come: On Wednesday, December 21, he boarded a plane bound for the United States. The law enforcement authorities there have applied for extradition at his place of residence in the Caribbean in order to open proceedings against him, among other things, for fraud.
At the same time, two other central figures in the FTX scandal are already a step further: Caroline Ellison, former head of Alameda Research, and Gary Wang, former chief technology officer of FTX, also announced Wednesday, the US Attorney’s Office announced , guilty of defrauding investors.
Alameda Research is at the center of the scandal
Ellison in particular caused a stir at the beginning of the scandal. As the managing director of the trading company that made risky investments closely linked to FTX, she is at the center of the allegations of fraud. The illicit diversion of billions of dollars in client assets, which Alameda used to speculate, led to a panic and withdrawal of client funds in November, ultimately spelling the demise of the FTX empire.
Caroline Ellison and Sam Bankman-Fried met at Wall Street trading house Jane Street. Shortly after Bankman-Fried left the trading firm to found Alameda Research, he brought Ellison on board. They are said to have been a couple once, living in a kind of shared flat in the Bahamas with other FTX employees, including Gary Wang. They have a lot in common: Both come from an academic family, his parents were professors at Stanford, theirs were professors at MIT. Both describe themselves as supporters of “effective altruism”. They were driven by the idea of earning as much money as possible in order to donate it later – at least that’s what they said.
Caroline Ellison – a math prodigy?
And both were considered exceptional talents: in portraits of the 28-year-old that appeared after the FTX collapse, she is described as a mathematical prodigy. The magazine “Forbes”, which put her on its prestigious “30 under 30” list, described her as a “math wizard”, the “Standard” writes very Austrian of a “wonder wuzzi and financial genius”.
In fact, the entrance exams to get a job at Jane Street are among the most demanding in the industry. Particularly rigorous is the selection for the program that interested Ellison: quantitative trading. The environment naturally attracts physicists, mathematicians and natural scientists from top universities.
Above all, she wanted to get rich through crypto
Caroline Ellison had a good, high-paying job at Jane Street. But she soon let herself be carried away by the temptations of the crypto industry. “I was like, ‘Oh man, that sounds pretty exciting’,” she told Forbes. After Bankman-Fried told her about his project, she couldn’t stop thinking about it. Soon after, she joined him. Like him, she saw crypto trading as an opportunity to make big bucks and support the effective altruist movement. She was not very convinced of the technology itself: In the official FTX podcast she said in 2021 that in her opinion most crypto projects had little real value.
“I’m basically just doing elementary school math,” Ellison, who studied math at Stanford, once said in an interview about her work at Alameda. “We have no idea what we’re doing here,” she said jokingly in another. She would advise her younger self to “be less risk-averse and love yourself more”. In retrospect, these statements seem like a mockery: Ellison took big risks as Alameda CEO. The company exploited price inefficiencies between different crypto exchanges – so-called arbitrage trading – for high profits. In order to maximize profits, trading volumes were multiplied by taking out loans, i.e. leveraged.
Her love of risk went too far
Although Caroline Ellison is a natural scientist, economic thinking was literally put in her cradle: her father Glenn Ellison heads the economics institute at MIT, and her mother Sara Fischer Ellison teaches there. Ellison knew Bayesian statistics as an elementary school student, and when she was in middle school she gave her father a self-made study of toys R Us stuffed animal prices for his birthday.
With her love of risk, she took it too far: Statements that Ellison made in a YouTube interview in the spring suggest that the controls at FTX and Alameda were rudimentary: “We don’t do any technical analysis. We see ourselves as liquidity suppliers. We want to help customers trade and get better prices for them,” she said.
Cooperation is likely to have a mitigating effect
After the allegations against FTX became known, Ellison initially stood by Bankman-Fried. She wrote on Twitter that the company’s financial position was stable. A few days after the collapse, however, she admitted in a meeting with employees that Alameda had used client funds from FTX to offset deficits, as reported by Forbes. The company owes its creditors an estimated $8 billion and the amount it has loaned to Alameda is said to be up to $10 billion.
While Bankman-Fried went on the offensive in the media, his ex-girlfriend then went into hiding. Now it’s clear why: Ellison, who is also accused of fraud, wants to cooperate with the prosecutor. She has posted bail of $250,000 for her release. If she provides significant assistance to law enforcement, her sentence is likely to be reduced.
For Sam Bankman-Fried, on the other hand, things are getting tight now – especially if other high-ranking managers follow the example of Ellison and Wang: Manhattan prosecutor Damian Williams asked in a video for others involved in the alleged fraud to come forward. “If you have been involved in any wrongdoing at FTX or Alameda, now is the time to speak up. We’re moving fast, and our patience doesn’t last forever.”