IE 11 is not supported. For an optimal experience visit our site on another browser.

Why Caroline Ellison’s guilty plea is bad news for Sam Bankman-Fried

It's going to be much, much harder for Bankman-Fried to argue that he didn't know what was happening before FTX imploded.
Image: Sam Bankman-Fried, co-founder of FTX Cryptocurrency Derivatives Exchange, departs from court in New York.
Sam Bankman-Fried, co-founder of FTX Cryptocurrency Derivatives Exchange, departs from court in New York on Dec. 22. Stephanie Keith / Bloomberg via Getty Images

Things have been going poorly for Sam Bankman-Fried lately. And they’re only getting worse. 

As the disgraced co-founder of the collapsed cryptocurrency platform FTX was being extradited to the U.S. from the Bahamas last week, some of his closest associates were turning on him

Caroline Ellison, the former head of the crypto hedge fund that allegedly misused FTX funds, pleaded guilty to several charges of fraud and conspiracy, and agreed to help federal prosecutors develop a case against Bankman-Fried. FTX co-founder Gary Wang also pleaded guilty to fraud and conspiracy charges, and is cooperating with the government. 

Both of them said that they knew what they were doing was wrong, according to transcripts of their pleas that were unsealed Friday, The New York Times reported. Ellison, who reportedly once dated Bankman-Fried, said she was “truly sorry” for defrauding customers and investors, the Times reported.

These developments put him in a much more vulnerable legal position.

This is devastating news for Bankman-Fried. These developments put him in a much more vulnerable legal position, and could tear apart his defense that his alleged misbehavior at the helm of FTX was an unintentional mistake.

His platform FTX imploded after a report emerged indicating that he may have been inappropriately misusing his customers’ funds for trading at Alameda Research, a crypto hedge fund he co-founded. That allegation was giant red flag. As crypto analyst Stephen Diehl told me in November, "That’s a conflict of interest. One exists to provide a service for customers, the other exists to make a profit." Since then prosecutors have charged him with illicitly using FTX funds not just for his hedge fund, but also for, among other things, huge political campaign contributions and ritzy real estate.

In the run-up to being extradited to the U.S., Bankman-Fried constantly insisted to the public that he made mistakes but he didn’t intentionally engage in the alleged misuse of customer funds, and that he was operating honestly as an executive. In other words, he's been implying that this was a case of incompetence rather than subterfuge. But if his top lieutenants at these firms are pleading guilty, helping to build a case against him, and saying they knew what they were doing, that doesn’t bode well for Bankman-Fried’s case for downplaying his knowledge of the full scope and implications of how he used his customers’ money. As witnesses against him, Ellison and Wang could provide critical details on Bankman-Fried’s intent and state of mind as FTX money allegedly found its way into another multibillion-dollar fund and Bankman-Fried emerged as a major political force in Washington.

This development isn’t just a blow to Bankman-Fried’s legal case, but could further damage a controversial philosophy that he championed as he became one of the richest people in the world. As I’ve written about recently, Bankman-Fried’s close association with effective altruism, a utilitarian philosophy that claims to use data to maximize human happiness, has raised questions about whether the school of thought gives license to predatory behavior. Depending on how you read some of Bankman-Fried’s accidental admissions to a reporter in November, he may have confessed that under the principles of effective altruism, he believes in doing reckless, immoral things for a perceived greater good.

Ultimately as his colleagues agree to cooperate with prosectors, the likelihood that we get a clearer picture of what really happened at FTX is increasing.