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On January 14, 2022, former crypto mogul Sam Bankman-Fried tweeted: “First, we’re launching a $2 billion venture fund, FTX Ventures. As a founder, it’s important to support other founders creating great companies. Hopefully this will allow us to do that a lot more.”

A noble goal, to be sure. But rather than raise capital for the fund from external investors, Bankman-Fried used money from third party lenders like Genesis Global Capital that had gone to Alameda Research, Bankman-Fried’s cryptocurrency trading firm, according to testimony from Caroline Ellison, former CEO of Alameda Research.

Ellison testified Tuesday as the fifth witness for the prosecution in Sam Bankman-Fried’s six-week trial. She claimed that the former FTX CEO directed her to commit fraud and money laundering crimes.

By the time Bankman-Fried posted that tweet, Alameda had already made certain venture investments, but the executive wanted to up the ante significantly. In the “summer or fall of 2021,” Bankman-Fried sent Ellison a potential bad scenario situation for FTX and Alameda, detailing a world in which the crypto market was down, Alameda’s investments plunged and the company becomes worthless. Bankman-Fried had put that reality into the 10th percentile, according to Ellison, which is still fairly risky in the trading world.

“10th percentile scenarios happen everyday,” said Ellison.

Bankman-Fried was thinking of investing another $3 billion into early stage companies and wanted to know how that would affect Alameda’s finances if the shit hit the fan. Not surprisingly, Ellison found that it would put Alameda in a riskier position than it was already in — at the time Alameda’s net asset value was negative $2.7 billion — and make it unlikely or impossible to pay off its loans if they were called all at once.

And because Alameda was operating under the assumption that it would take FTX customer funds to repay any loans, that would mean FTX would lose a significant amount of money in this scenario, as well.

Ellison testified that she shared these concerns with Bankman-Fried and played out alternative scenarios to taking out more loans for investments, such as raising more equity, investing less in ventures and selling more FTT (FTX’s crypto token). Bankman-Fried asked her to run the numbers again assuming that all of Alameda’s loans from Genesis were fixed, rather than open-term. Most of Alameda’s loans at the time were open-term, which is more risky because it means the loan can be called at any time.

“…and then you would have to repay it even if you don’t necessarily have the funds available,” said Ellison.

In a scenario where all of Alameda’s loans could be changed to fixed-term, Ellison estimated that the company was down to a 30% chance of being unable to pay off its loans in a bad market scenario.

Bankman-Fried urged her to try to change Alameda’s loans to fixed-term. Ellison was able to change some, but the majority remained open-term. She had run a scenario for that reality, as well.

If there were to be a market downturn with Alameda’s mostly open-term loan structure, and if Alameda made $3 billion in investments, Ellison found the probability of Genesis recalling its loans would be 25%. The probability that the company would be unable to make those loan payments would go from 30% to 100%.

“That means if we made this $3 billion of investments and there was bad market news leading to a significant market downturn and our loans got called, that there was no way we would be able to make the payments,” said Ellison, noting that Alameda would be unable to repay its loans even accounting for the unlimited line of credit and access to FTX customer funds.

In the end, Bankman-Fried appears to have settled on investing $2 billion into venture investments, backed by FTX rather than LPs, but the result was the same.

Ellison’s testimony and cross examination will continue on Wednesday.