To: Interested Parties
From: Dennis Kelleher, President and CEO
Cc: Media Contact: Anton Becker, Dir. of Communications, abecker@bettermarkets.org
Date: September 20, 2024
Re: SBF/FTX Related Sentencing: Sept. 24th Sentencing of Caroline Ellison for her role in the SBF’s FTX fraud
Next Tuesday, September 24, 2024, Caroline Ellison, a key participant in the FTX crypto scandal and a close associate and one-time girlfriend of convicted cryptocurrency kingpin Sam Bankman-Fried (“SBF”), will be sentenced for her part in one of the largest criminal frauds in financial history. Under applicable sentencing guidelines, Ellison is facing many years in prison for her crimes.
Ellison, who pleaded guilty and testified against SBF, is arguing for no prison time and only a period of supervised release due to her cooperation and the circumstances under which she claims to have committed her crimes. The U.S. Attorney did not recommend a specific sentence, but it made a strong case for leniency as a reward for Ellison’s extensive cooperation and remorse. (The details of these views – and Ellison’s conduct – are discussed below.)
It is critically important, as a general matter, for corporate insiders like Ellison to come forward to help prosecutors unravel complex and often hidden financial crimes, and the earlier the better. In this case, while one can question the extent to which the violations remained hidden after FTX’s public collapse, the issues were clearly complex and difficult to unravel. It must be remembered, however, that Ellison was not a whistleblower and did not come forward until FTX had imploded.
It must also be remembered that it is not an exaggeration to say that Ellison was a major if not indispensable facilitator and contributor to the entire fraud. Ellison faced a choice at multiple critical junctures during the criminal enterprise: do wrong or do right; break the law or not. Every time she choose to break the law. Yes, once the scheme blew up and the fraud burst onto into public view, she rushed to cooperate, but she could have single-handedly stopped this fraud at any time, long before billions of dollars were lost, hundreds of investors were defrauded, and tens of thousands of customers were ripped off. She chose not to, which resulted in, as the U.S. Attorney has said, “one of the largest financial frauds in history.”
These circumstances raise a difficult balancing task: fairly punishing the individual criminal who has cooperated in a particular case while at the same time sending a strong message of deterrence to those thinking of breaking the law in the future. Because it is so difficult to detect corporate, financial, and while collar crimes, which largely go undiscovered and unpunished, deterrence is of particular importance. That’s why the balance in these cases should tip toward harsher punishments and why monetary penalties that leave the white-collar criminals penniless and serving prison time behind bars are essential.
There is another key issue at stake in corporate, financial, and while collar cases. When there are so many other non-white-collar criminals convicted of much less significant lawbreaking who are spending years if not decades in prisons across America, how can a justice system worthy of its name ever be viewed as fair if there is no prison time for white-collar criminals. Equal justice under law is at stake – as well as American’s faith, trust, and confidence in the justice system – in white collar cases and that should remain uppermost in mind when determining sentencing.
Thus, the key question at the heart of this sentencing is: Does a knowing and significant participant in a massive, years-long, historically large criminal financial fraud deserve no jail time due to her cooperation and contrition, even accepting it as sincere? Considering all the issues and giving fulsome weight to her cooperation, the answer must be no. Ellison should be sentenced to at least one year in prison followed by five years of supervised release; required to disgorge every penny attributable to her activities related to FTX; and ordered to pay a civil fine of $1 million.
The Parties’ Positions.
Naturally, Ellison’s attorneys have filed an extensive sentencing memorandum detailing her life story and painting a very sympathetic portrait. It casts her as exceptionally intelligent and compassionate, an altruist at heart who was heavily swayed by the personal and professional influence of SBF, and someone who is genuinely remorseful for her wrongdoing. It also details her extensive cooperation with prosecutors, the SEC and CFTC, the bankruptcy trustee, and private plaintiffs seeking recovery. It includes over three dozen letters of support from family and friends as well as attorneys and officials who benefited from her cooperation. They urge the court to hand down a sentence of time served with a period of supervised release.
What’s striking is that the government’s extensive sentencing letter is almost equally praising of Ellison. The letter submitted by the U.S. Attorney’s Office (“USA Letter”) advises the Court “of her extraordinary cooperation that was crucial to the Government’s successful prosecution of Samuel Bankman-Fried for one of the largest financial frauds in history.” It goes on to say that Ellison’s testimony was a “cornerstone of the trial against Bankman-Fried”; that her testimony was “credible and compelling”; and that “Ellison approached her cooperation with remarkable candor, remorse, and seriousness.”
The USA Letter details Ellison’s cooperation not only with the prosecutors but also with the SEC and CFTC investigations, which resulted in a $12.7 Billion consent judgment, “with all monetary relief used to compensate FTX customers and victims of FTX’s fraud.” The letter also notes that “Ellison cooperated at great personal and professional cost, enduring harsh media and public scrutiny and attempted witness tampering by Bankman-Fried.” It emphasizes Ellison’s genuine remorse, observing that “[r]arely, however, does the Court have an independent basis to credit the defendant’s earnest remorse and acceptance as it does here.”
Recall Ellison’s Central Role, the Harm Done, and the Wealth She Accumulated.
There is every reason to credit these claims that Ellison’s cooperation was extensive and critically helpful and that she is genuinely remorseful. There is no question she deserves leniency. The question is how much, and to evaluate that one must remember what happened in this extraordinary scandal, Ellison’s role in it, and the damage it caused.
Ellison’s Role.
The USA Letter confirms that “Ellison played a core role in Bankman-Fried’s criminal schemes.” For example, she was instrumental in perhaps the central fraud at the heart of FTX. Alameda Research amassed huge debts after it secured large loans from an array of lenders to make speculative investments. It also used those funds to repurchase shares in FTX held by Binance, and to funnel money to SBF and others in the enterprise. Once the financial position at FTX and Alameda began to surface, the lenders called the loans. And as described in the USA Letter, “[t]o conceal their wrongdoing, and at Bankman-Fried’s direction, Ellison created misleading versions of Alameda’s balance sheet, and sent fraudulent balance sheets to Alameda’s lenders to forestall demands for repayment and obtain new loans.”
Even worse, Ellison was directly involved in the use of FTX investor funds to cover Alameda’s debts: “Alameda had made billions of dollars of venture investments and had bought back FTX equity from Binance using open-term loans and that when the loans had been recalled, we had to use or we did use FTX customer funds to repay them.” “After that, as Ellison testified, Bankman-Fried continued to direct her ‘to use FTX customer funds to repay loans.’ Alameda proceeded to repay the third-party lenders using FTX customer funds.” She was also directly involved in defrauding FTX investors in other ways. For example, she “acceded to Bankman-Fried’s request to post tweets meant to reassure FTX customers about Alameda’s balance sheet, despite believing the tweets to be misleading.” She also played a role in the conspiracy to defraud FTX investors, “including by agreeing to hide information from FTX auditors.”
On December 19, 2022, pursuant to a cooperation agreement with the Government, Ellison pleaded guilty to a Superseding Information that charged Ellison with seven major violations of law: (1) conspiracy to commit wire fraud, in violation of 18 U.S.C. § 1349; (2) wire fraud on customers, in violation of 18 U.S.C. § 1343; (3) conspiracy to commit wire fraud on lenders, in violation of § 1349; (4) wire fraud on lenders, in violation of 18 U.S.C § 1343; (5) conspiracy to commit commodities fraud, in violation of 18 U.S.C. § 371; (6) conspiracy to commit securities fraud, in violation of 18 U.S.C. § 371; and (7) conspiracy to commit money laundering, in violation of 18 U.S.C. § 1956(h).
The Harm.
The harm to investors was immense, notwithstanding the claim that FTX investors will eventually recover much if not all of their losses (at least as of the time FTX declared bankruptcy). Some investors certainly liquidated considerable losses as the revelations about FTX’s precarious financial condition began to emerge and the collapse of FTX approached. Moreover, as we detailed in our previous memo regarding the sentencing of SBF, claims regarding potential investor recovery paint an incomplete picture:
As the Government in its sentencing memo correctly points out, however, SBF’s victims’ potentially recovering their money years later is no reason to reduce SBF’s sentence for his crimes:
“That some victims may receive some money back through FTX’s bankruptcy is of little comfort for those victims who needed the money in November 2022. The suffocating sense of dread and despair that victims felt when they could not withdraw their money, their shame and embarrassment, and the resulting damage to lives and businesses, cannot be undone through the bankruptcy . . . [a]nd even as victims are repaid, that is the result of extensive work in the bankruptcy process and criminal forfeiture, not the result of the defendant’s actions, which in many respects have been counterproductive.”
Benefits to Ellison.
Finally, there are the benefits to Ellison. The USA Letter barely touches on the subject of the wealth that Ellison amassed during her involvement at FTX, simply observing “[t]he Government found no evidence that Ellison enjoyed the wealth generated by the fraud,” (emphasis added). For their part, Ellison’s attorneys clearly indicate that Ellison amassed huge wealth from FTX. But they downplay that fact by claiming that “She is finalizing agreements with the government and the FTX Debtors that she expects will leave her without anything she earned while employed at Alameda” (emphasis added), adding that “[d]espite the value of her FTX.com user account, Caroline never lived an extravagant life.” Moreover, they argue, “[a]t no point did Caroline buy real estate, vehicles, designer clothing, or other luxury goods.” And she supposedly “donated millions of dollars” to charity (a claim that should be required to be independently verified and publicly detailed).
How Ellison ultimately fares financially as a result of her role at FTX remains to be seen. But, regardless of whether she “enjoyed” the wealth she amassed while at FTX and breaking the law, even total surrender of all of her remaining compensation from FTX does not negate the wealth she had access to while she worked there. That she “expects” future actions “will leave her without anything she earned while employed at Alameda” is simply insufficient. It should be required as a part of her sentencing that she give up every penny attributable to her time at FTX and that a significant financial penalty be imposed on top of that. Disgorgement of all ill-gotten gains is essential but only one key component of an appropriate sentence because, otherwise, criminals will be incentivized to commit crimes: If the financial consequences of criminal conduct stop at disgorgement, then those inclined to violate the law will assume that at worst, they will be required to return what they took—and that is only if they are caught. That’s why a financial penalty on top of disgorgement is critically important.
The Core Question.
Having served as a principal and knowing player in one of the most egregious financial frauds in history, does Ellison deserve to avoid prison time altogether? Yes, she cooperated; yes, she is genuinely remorseful; and yes, she suffered public condemnation and harassment. But does that mean that any fraudster can victimize countless investors and then walk free as long as they come forward when the scheme collapses and becomes public, feel genuine remorse, and cooperate with officials? How could that approach possibly serve as an effective deterrent against wrongdoing? And what do you say to the thousands of investors and others who were victims of the scandal? That her cooperation and contrition somehow account for all the damage they suffered as a result of a fraud that she was instrumental in implementing over a number of years?
That would violate the most basic notions of justice. As we have argued consistently, those who lead, direct, participate in, and help carry out serious, intentional, and damaging financial crimes must be held accountable and properly punished. Moreover, their sentences must send a clear message that will deter others from committing future violations of the law. That’s true for those who work at the largest banks on Wall Street as well as for those who, like Ellison, carry out a large-scale fraud through a new and novel financial produce such as crypto.
The judge on Tuesday has a tough job balancing competing interests here, but, as we said above, the sentence should be one year in prison; five years of supervised release; required to disgorge every penny attributable to her activities related to FTX; and pay a civil fine of $1 million.
