How Caroline Ellison Landed at the Center of the FTX Crypto Collapse

On a video call in early November, Alameda Research staff dialed in to learn the fate of the trading company that was on the brink.

It was up to Caroline Ellison to break the bad news. Alameda was the center of Sam Bankman-Fried’s collapsing FTX empire. Ms. Ellison, who had just turned 28, stood in the center of Alameda. And they were all in crisis.

Alameda and crypto exchange FTX were both the brainchild of Ms. Ellison’s friend Mr. Bankman-Fried, and he had chosen her to run Alameda the year before. For a time, they rode the crypto wave together, with FTX eventually hitting a blockbuster valuation of $32 billion. This month everything collapsed within a few days.

Concerned about the financial health of the companies, clients withdrew their money from FTX in a short, hectic time. The companies struggled to stay afloat, but filed for bankruptcy shortly after Ms. Ellison called the employees. Mr. Bankman-Fried resigned as chief executive of FTX.

Prosecutors, regulators and even FTX’s new CEO are investigating what happened. Customers are losing hope that they will ever see their money again. Lawsuits followed and many top employees left. Ms Ellison was fired along with Gary Wang and Nishad Singh. You were also Mr. Bankman-Fried’s top deputy.

Before the crash, Mr. Bankman-Fried embraced the limelight, promoting crypto and championing his interests in Washington while Ms. Ellison stayed in Engineering. Alameda, a trading company almost wholly owned by Mr. Bankman-Fried, had one overarching goal: make money. Ms. Ellison was put in charge of keeping it running.

In a handful of podcasts and other public appearances, Ms. Ellison was quick to summarize her rapid rise as almost accidental. She joined Wall Street right after graduating from Stanford University in 2016, though the move was less a calling than an answer to the question she asked herself in college: What are math students supposed to do with their lives, anyway?

At her first job at quant trading powerhouse Jane Street Capital, she met another 20-year-old trader, Mr. Bankman-Fried. Like her, he had been educated by two professors. Like them, he spoke highly of a movement called “effective altruism,” or the idea of ​​making lots of money to give away.

When Mr. Bankman-Fried left to found Alameda, Ms. Ellison soon followed in what she called “a blind leap into the unknown.” She was barely out of college — but she was also one of the more experienced traders there, she said on a 2020 FTX podcast.

Caroline Ellison grew up in suburban Boston, the daughter of two MIT economists. She read the second Harry Potter book when she was 5, she said on the podcast. At 8, she wrote an analysis of stuffed animal prices, according to Forbes. Her father, inspired by his daughters, wrote advanced math textbooks for children bored with elementary school.

She and Messrs. Bankman-Fried, Wang and Singh formed the board of directors of the Future Fund, which aims to provide grants to charitable organizations and investments in “social impact businesses.” Critics say the effective altruism worldview can encourage excessive risk-taking — since people can always argue that bigger paydays lead to bigger giving.

Messrs. Bankman-Fried, Wang and Singh owned 100% interest in at least some of the FTX companies, according to a bankruptcy court filing by the new CEO.

Cryptocurrency exchange FTX was seen as a survivor in a struggling industry, but over the course of six days, the exchange collapsed due to a sudden liquidity crisis. WSJ explains the factors that drove FTX’s growth and what led to its decline. Illustration: Alexandra Larkin

At times, Ms Ellison and Mr Bankman-Fried were romantically involved, the Wall Street Journal previously reported.

When Ms. Ellison arrived at the Alameda, she was surprised at how slow even the fast-paced Jane Street seemed. “It was like, wow, the process of doing things is just someone suggesting something and then someone coding it and posting it,” she said on the FTX podcast. “An hour later and it’s already happened.”

Everything in Mr. Bankman-Fried’s orbit seemed to be moving at the same breakneck speed. He founded an Alameda sister company, FTX, in 2019 and it only took a few years for it to become one of the largest crypto exchanges in the world. Mr. Bankman-Fried served as CEO of both companies for a period.

Stimulant use was rampant among its upper echelons, the Journal previously reported.

“Nothing beats regular use of amphetamines to make you realize how stupid many normal, non-drug human experiences are,” Ms Ellison tweeted last year.

Alameda and FTX had employees in Hong Kong and the Bahamas. Ms. Ellison, like Mr. Bankman-Fried, had been working most of the time from the Bahamas lately, according to a person familiar with the matter.

Alameda’s trading strategies included arbitrage – buying a coin in one place and selling it elsewhere for more. FTX, meanwhile, has emerged as a major marketplace for investors large and small to buy and sell crypto. As a major player in digital currencies, Alameda frequently traded on the FTX platform.

Around 2020, Alameda started “yield farming” and invested in tokens that pay interest-like rewards. At first, Ms. Ellison pushed back. On an FTX podcast in early 2021, she recalled arguing about whether the firm should get involved and said she was concerned about the risk. “I lost that fight,” she said on the podcast.

Over time, Alameda’s aggressive trading strategies drew more on intuition and indicators such as Elon Musk’s social media posts, the statement said Tweets in 2021 by Sam Trabucco, then another rising star at Alameda.

In the fall of 2021, cryptocurrency prices neared their all-time highs and FTX celebrated its latest deal for the naming rights of the University of California, Berkeley football stadium. Mr. Bankman-Fried appointed Ms. Ellison and Mr. Trabucco as Co-CEOs to lead Alameda so he could focus on FTX. According to Alameda’s press release at the time, they inherited a business with 25 employees.

Although Mr. Bankman-Fried was no longer CEO, Alameda was still his company. According to FTX’s bankruptcy filings, he owned 90% of the trading company. Mr. Wang owned the other 10%.

In early 2022, digital currencies were in free fall. Many of the industry’s largest investment and lending firms began to buckle and then cave in. As panic swept through the crypto world, Mr. Bankman-Fried attempted to act as a savior, buying up some troubled firms and lending to others to help stabilize the market.

Behind the scenes, however, Alameda was far from immune to the market shakeout. Mr. Bankman-Fried’s vaunted trading company also received margin calls.

In August of this year, Mr. Trabucco announced that he was stepping down as co-CEO. In a lengthy Twitter thread, he said working at Alameda had been “difficult and exhausting and consuming.”

In early November, the spotlight began, which Mr. Bankman-Fried so often coveted, to reveal the problems of his companies. A CoinDesk report raised concerns about the financial health of Alameda and FTX. Changpeng Zhao, head of rival exchange Binance, tweeted that his firm would dump its holdings in FTT as a risk management measure. FTT is a digital currency of FTX.

While Mr. Zhao and Mr. Bankman-Fried argued over Twitter, Ms. Ellison tried to cool the fire. “If you want to minimize the impact of the market on your FTT sales, Alameda will happily buy anything for $22 today!” she tweeted, tagging Zhao-san. A few minutes earlier, FTT was trading around $22.15, according to CoinDesk data.

When asked on Twitter why Ms Ellison made the offer, Mr Bankman-Fried replied: “I mean it’s up to her to answer but they said they were concerned about the implications this would solve for them and this is just faster and easier.” Binance contacted them about the offer but never received a response, the journal reported.

Ultimately, the close connection between Alameda and FTX became their undoing. According to previous reports in the Journal, FTX has used client funds to loan Alameda billions of dollars for risky deals and investments. In traditional finance, regulators require brokers to segregate client funds from any capital they use to trade.

In the video conference in early November, which took place late at night Hong Kong time, Ms Ellison told staff that FTX had used client funds to help Alameda meet its liabilities, the Journal previously reported. She apologized and said she disappointed the staff, the Journal reported. By then the companies’ financial problems had become public, but the companies had not yet declared bankruptcy,

Ms. Ellison also informed staff that she, Messrs. Bankman-Fried, Singh and Wang were aware of the decision to send client funds to Alameda.

Many Alameda employees resigned the next day, the Journal reported.

– Dave Michaels, Alexander Osipovich, Elaine Yu and Mark Maremont contributed to this article.

Write to Hannah Miao at [email protected] and Justin Baer at [email protected]

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