Last week, Sam Bankman-Fried’s criminal trial heated up as his ex-girlfriend, Caroline Ellison, took the stand in what was the most-anticipated, and arguably most explosive, testimony of the trial thus far.
Ellison—the former CEO of Bankman-Fried’s hedge fund, who like other top FTX lieutenants Gary Wang and Nishad Singh took a plea deal with the government—testified on both Tuesday and Wednesday, revealing that Alameda Research had propped up FTX’s native cryptocurrency, FTT, from the beginning and at Bankman-Fried’s direction.
There’s more: Ellison testified that Bankman-Fried told her that he gave himself a 5% chance “he would become president someday,” as my colleague Ben Weiss detailed. Ellison also laid out SBF’s utilitarian belief system, including how he “thought the only moral value that mattered was whatever would maximize utility,” which she described to mean “the greatest good for the greatest number of people or beings.”
“Rules like ‘don’t lie’ or ‘don’t steal’ didn’t fit into that framework,” Ellison testified.
She also testified that, in the fall of 2022, Bankman-Fried had tried to encourage Crown Prince Mohammed bin Salman Al Saud of Saudi Arabia to invest in FTX as his hedge fund allegedly was withdrawing customer capital from the exchange, as Weiss reported from the courthouse.
Then there are allegations that Alameda created several accounts on a Chinese crypto exchange called OKX “using the IDs of different people who I believe were Thai prostitutes” as part of an effort to retrieve funds that were stuck on the exchange, Ellison said. She also testified that Alameda later bribed a Chinese official with $150 million to retrieve funds on OKX and another crypto exchange. Ellison wrote in a document she sent to Bankman-Fried that Alameda had paid $150 million “for the thing.”
We also learned that Ellison was given surprisingly little equity compensation compared to Bankman-Fried and his other top lieutenants, Wang and Singh. Ellison had no equity in Alameda, and she was only given a half-a-percentage-point stake in FTX. Comparatively, FTX cofounder Gary Wang, had a 16% stake in FTX and 10% stake in Alameda. (Michael Lewis’ new book states that Singh owned a 5% stake, and Bankman-Fried himself owned 90% of Alameda and more than half of FTX.)
Apparently, it was Ellison’s testimony that prompted the most reaction out of Bankman-Fried in trial. One of the prosecutors argued to Judge Lewis Kaplan during the trial that Bankman-Fried had “laughed, visibly shaken his head, and scoffed” during Ellison’s testimony on Wednesday, as Weiss reported (Weiss couldn’t see for himself, as media were allotted three benches in the back of the courtroom).
Paradigm investor Matt Huang’s emails…
Last week, a few reporters in the Fortune newsroom were parsing through an email exchange between Paradigm investor Matt Huang and Bankman-Fried that was entered into evidence during Huang’s examination a couple weeks ago. The emails themselves offered some interesting insight into the skewed power dynamic between FTX’s venture capital investors and its founder, where SBF had leverage to set the terms.
“We really like you and the FTX business, but feel $20B+ is mismatched with the scale of the current business. We gather that many other high quality investors may feel similarly,” Huang wrote to SBF in an April 2021 email. “Would you entertain an offer around $10B if we can aggregate a super high quality syndicate? Eg perhaps it is Paradigm, Tiger, Coatue, Ribbit, MFN, etc? This would still be low (~4%) dilution, while getting a bunch of premium names on the cap table ahead of any plans to go public / make inroads into the US.”
A few days later, Bankman-Fried sent a somewhat accusatory email to Huang: “I was wondering if you could give more context on conversations you’ve been having with other VCs. I suspect that a somewhat garbled version of those is leaking out and being reframed as coming from us…”
In a later email, SBF specified that ‘word on the street’ was that FTX was asking for a $12 billion valuation, and that SBF was “90% sure it’s coming from those conversations.”
“Not super appreciative of that, though no reason to think it’s you guys in particular, could be coming from any one of them. Frankly a pretty bad look given the Coinbase holdings many of that group have, makes us wonder what the motivation behind it is. I’m not sure what your guys thoughts are on the raise but maybe to be more explicit about this: it’s totally fine if you want a $12b val, but we don’t, and we would rather just not raise, which is totally fine with us! Also lots of others are happy with 20b, and FTT implies a much higher val, so would be kinda weird for us to raise a 10-12 from a group of people who have not historically been very aligned with us.”
Despite Huang’s expressed concerns in emails of price and that FTX was owned and controlled by SBF rather than a "more traditional corporate governance model," FTX would go on to close a $900 million round at an $18 billion a few months later.
We all know the ultimate outcome. Paradigm, in full, put $278 million into FTX between its failed U.S. and international FTX exchanges. Huang testified that has been marked down to zero.
You can read the full email exchange here and look at the pitch deck SBF used to fundraise here.
More crypto chaos…Last week, the Federal Trade Commission said it had settled with the now-bankrupt crypto trading firm Voyager. As part of the settlement, Voyager is permanently banned from ever handling consumers’ assets again, and the FTC filed a suit against the company’s former CEO, Stephen Ehrlich, for “falsely claiming that customers’ accounts were insured by the Federal Deposit Insurance Corporation (FDIC) and were ‘safe.’” (Ehrlich’s wife, Francine, is named as a relief defendant, too.) In tandem, the CFTC charged Ehrlich with fraud and registration failures. In a statement to Bloomberg, Ehrlich said he was “outraged and deeply dismayed” by the allegations from the CFTC and FTC and that he was being used as “scapegoat for the bad actions of others.”
See you tomorrow,
Jessica Mathews
Twitter: @jessicakmathews
Email: jessica.mathews@fortune.com
Submit a deal for the Term Sheet newsletter here.
Joe Abrams curated the deals section of today’s newsletter.
