Caroline Ellison may not face prison time despite her role in FTX collapse

Caroline Ellison, who was the main witness in the criminal case against disgraced FTX founder Sam Bankman Freed, will be sentenced on Tuesday.

Ellison’s role in the collapse of the crypto empire run by his former boss and ex-lover, Sam Bankman Freed, was to lie to investors and help steal billions of dollars from FTX clients, then divert that money to fund bets and debts incurred at Alameda Research, the digital assets hedge fund he led as CEO.

In the eyes of the U.S. justice system, Bankman Freed and Ellison both committed the same crime.

two counts of wire fraud, two counts of wire fraud conspiracy, one count of securities fraud conspiracy, one count of commodities fraud conspiracy, and one count of money laundering conspiracy. These charges carry a statutory maximum sentence of approximately 110 years, with progressively increased sentences depending on the scope of the crime and the defendant’s criminal history.

CNBC spoke with former federal prosecutors, trial lawyers and legal experts to get their thoughts on what might happen to Ellison at Tuesday’s hearing, and they agree that he likely won’t spend any time in prison.

After a 12-person jury unanimously found Bankman-Fried guilty on all seven criminal counts in November, he was sentenced to 25 years in prison for crypto fraud in March and ordered to pay $11 billion in forfeiture.

Unlike Bankman Freed, Ellison agreed to a plea deal in December 2022. She pleaded guilty to all charges against her and cooperated with the government, regulators and the FTX bankruptcy estate for two years.

Meanwhile, Bankman Freed continues to deny virtually all criminal wrongdoing and is seeking to have the case reopened.

Lawyers for Ellison and Bankman Freed did not immediately respond to requests for comment.

In white-collar crime, even in a case that has been called “one of the largest financial frauds in American history,” cooperation with prosecutors goes a long way.

Kevin J. O’Brien, a former assistant U.S. attorney in New York who specializes in white-collar criminal defense, said Mr. Ellison was the most important of several insiders who testified for the government.

“Her close relationship with Sam allowed her to paint a personal portrait of Bankman Freed, who was certainly an elusive character, which was perhaps unique in the government’s case,” O’Brien said.

The Federal Probation Office recommended “three years of supervised imprisonment,” citing Ellison’s “exceptional cooperation with the government” and his “otherwise spotless record.”

District Judge Lewis Kaplan is not required to accept the Probation Department’s recommendation, but O’Brien said that along with any fine, it would be a “fair sentence” that reflects the “enormous value” of Ellison’s cooperation.

The U.S. justice system tends to give shorter sentences to those who help achieve a higher goal, said Braden Perry, a former senior litigation lawyer at the Commodity Futures Trading Commission.

Perry estimated that Ellison, the third executive linked to Bankman Freed companies to be sentenced, faces a maximum sentence of 18 months in prison and three years of probation.

Although Ellison was deeply involved in the fraud, “she did not have the same authority or supervisory power as SBF, which will likely influence the judge’s decision to impose a lighter sentence,” Perry said.

Yesha Yadav, a law professor and associate dean at Vanderbilt University, said Ellison’s conviction would likely include several years of probation and community service with a series of activity restrictions, including a ban on trading in crypto and non-crypto markets and international travel.

Unlike Bankman Freed, who has received public warnings and been portrayed by the government as a repeat offender, Ellison has been repeatedly praised by prosecutors and FTX’s new CEO and bankruptcy trustee, John Ray III.

“When she took to the witness stand she came across as someone who felt guilt and anguish over what she had done,” Yadav said.

SBF’s lawyers did not ask for the maximum six-and-a-half-year sentence, but Kaplan said Ellison’s testimony was ultimately crucial in the decision to sentence Bankman Freed to nearly four times that amount.

Kaplan also sided with Ellison when federal prosecutors revoked bail for Bankman Freed, who leaked private diaries written by Ellison, and sent him back to prison on witness tampering charges. Kaplan said Bankman Freed’s leaks were designed to “hurt” and “discredit” Ellison.

“Over the past two years, Mr Ellison has endured a series of public humiliations, often with sexist overtones,” Yadav said.

Former federal prosecutor Paul Tuchman said most judges are unwilling to send people to prison if they don’t pose a threat of future harm to others.

“The likelihood that Mr. Ellison will again harm anyone through criminal conduct in the future is extremely remote,” Tuchman said.

If Kaplan avoids prison time at Ellison’s sentencing, it would bode well for FTX’s former head of engineering, Nishad Singh, and FTX co-founder and CTO, Gary Wang. Singh and Wang are scheduled to be sentenced on October 30 and November 20, respectively.

“I think Judge Kaplan has the ‘room’ to not give all of these people prison time if he wants to,” Tuchman said, adding, “Most judges want to encourage these people to cooperate, and giving them prison time and probation is the best way to go.”

VIDEO: Sam Bankman Freed’s family speaks out about verdict: We’re heartbroken but will continue to fight for our son