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

During a video call in early November, Alameda Research employees called in to learn the fate of the trading company, which was on the brink of collapse.

It fell to Caroline Ellison to deliver the bad news. Alameda was at the center of Sam Bankman-Fried’s collapsing FTX empire. Mrs. Ellison, who had just turned 28, was in downtown 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 help run Alameda the previous year. For a time, they rode the crypto wave together, with FTX eventually achieving a blockbuster valuation of $32 billion. This month it all came crashing down in a matter of days.

Customers had become fearful for the financial health of the companies and ripped their money out of FTX in a short, frenzied period. The firms scrambled to stay afloat, but they filed for bankruptcy shortly after Ms. Ellison’s call to the employees. Mr. Bankman-Fried resigned as CEO of FTX.

Prosecutors, regulators and even FTX’s new CEO are investigating what happened. Customers lose hope that they will ever see their money back. Lawsuits followed and many top employees left. Ms Ellison has been fired along with Gary Wang and Nishad Singh. They were also top representatives of Mr. Bankman-Fried.

Before the crash, Mr. Bankman-Fried embraced the spotlight, promoting crypto and lobbying for his interests in Washington, while Ms. Ellison remained in the engine room. Alameda, a trading firm almost wholly owned by Mr. Bankman-Fried, had one overarching goal: to make money. Mrs. Ellison was tasked with keeping it running.

In a handful of podcasts and other public appearances, Ms. Ellison was quick to summarize her rapid ascent as almost accidental. She joined Wall Street right after graduating from Stanford University in 2016, though the move wasn’t so much a calling as an answer to the question she asked herself in college: What are math students really supposed to do with their lives?

It was at her first job, at quantitative trading powerhouse Jane Street Capital, that she met another trader in his twenties, Mr. Bankman-Fried. Like her, he had been raised by two professors. Like them, he spoke highly of a movement called “effective altruism,” or the idea of ​​making a lot of money to give away.

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

Caroline Ellison grew up in the Boston suburbs, the daughter of two MIT economists. At five, she read the second Harry Potter book to herself, she said on the podcast. At age 8, she wrote an analysis of stuffed animal prices, according to Forbes. Her father, inspired by his daughters, wrote advanced math textbooks for children who were bored with basic lessons.

She and Messrs. Bankman-Fried, Wang and Singh formed the board of what they called the Future Fund, which aims to provide grants to non-profit organizations and investments in “socially impactful businesses.” Critics say altruism’s effective worldview can encourage excessive risk-taking, as people can always argue that bigger paydays lead to bigger donations.

Messrs. Bankman-Fried, Wang and Singh all had interests 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 demise. Illustration: Alexandra Larkin

Sometimes Ms. Ellison and Mr. Bankman-Fried were romantically involved, The Wall Street Journal previously reported.

When Mrs. Ellison arrived in Alameda, she was surprised how even the fast Jane Street looked sluggish. “It was like, wow, the process of doing things is just someone suggests something and then someone encodes it and releases it,” she said in 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 lightning speed. He launched 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 was CEO of both companies for some time.

Stimulant use was common among his upper echelon, the Journal previously reported.

“There’s nothing like regular amphetamine use to make you realize how stupid many normal, non-medicinal human experiences are,” Ms Ellison tweeted last year.

Alameda and FTX had employees in both Hong Kong and the Bahamas. Ms. Ellison, like Mr. Bankman-Fried, had recently worked extensively from the Bahamas, according to a person familiar with the matter.

One of Alameda’s trading strategies was arbitrage: buying a coin in one location and selling it elsewhere for more. FTX, meanwhile, emerged as an important marketplace for investors large and small to buy and sell crypto. As a major digital currency player, Alameda regularly traded on the FTX platform.

Around 2020, Alameda began “yield farming,” investing in tokens that pay out interest-like rewards. First Mrs. Ellison pushed back. In an FTX podcast in early 2021, she recalled arguing over whether the company should commit, and said she was concerned about the risks. “I lost that argument,” she said in the podcast.

Over time, Alameda’s aggressive trading strategies relied more on intuition and indicators like Elon Musk’s social media posts, according to tweeting in 2021 by Sam Trabucco, then a rising star at Alameda.

In the fall of 2021, cryptocurrency prices approached their all-time highs and FTX celebrated its recent deal for the naming rights of the University of California, Berkeley’s football stadium. Mr. Bankman-Fried appointed Ms. Ellison and Mr. Trabucco as co-CEOs to run Alameda so he could focus on FTX. They inherited a 25-person operation, according to Alameda’s press release at the time.

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 remaining 10%.

In early 2022, digital currencies were in free fall. Many of the industry’s largest investment and lenders began to succumb and then relented. As panic swept through the crypto world, Mr. Bankman-Fried attempted to act as a savior, buying out some troubled companies and extending credit to others to help stabilize the market.

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

In August of this year, Mr. Trabucco 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 that Mr. Bankman-Fried so often courted began to bring to light 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 company would dump its FTT holdings as a risk management move. FTT is a digital currency of FTX.

While Mr. Zhao and Mr. Bankman-Fried fumbled through Twitter, Ms. Ellison tried to cool the fire. “If you want to minimize the market impact on your FTT sales, Alameda is happy to buy anything from you today for $22!” she tweeted, tagging Mr. Zhao. A few minutes earlier, FTT had traded around $22.15, according to CoinDesk data.

When asked on Twitter why Ms Ellison made the offer, Mr Bankman-Fried replied: “I mean, that’s for her to answer, but they said they were worried about the impact this would have on them , and this is just faster.” and easier.” Binance contacted her about the offer but never heard back, the Journal reported.

In the end, the close ties between Alameda and FTX were their downfall. FTX used client money to lend billions of dollars to Alameda for high-risk transactions and investments, according to previous reports from the Journal. In the traditional financial industry, regulators require brokers to separate clients’ funds from the capital they use to trade.

During the video meeting in early November, held late in the evening Hong Kong time, Ms. Ellison told employees that FTX used customer money to help Alameda meet its obligations, the Journal previously reported. She apologized and said she had disappointed the staff, the Journal reported. By then, the companies’ financial problems had become public knowledge, but the companies had not yet filed for bankruptcy.

Ms. Ellison also told employees that she, Messrs. Bankman-Fried, Singh and Wang were aware of the decision to send customer money to Alameda.

Many Alameda employees quit 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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