Former Alameda Research CEO Caroline Ellison will learn her fate in a few hours. She may spend the next several months or years behind bars, but her attorneys, the Department of Justice and the Probation Office all seem to think she should remain a free woman after the amount of cooperation she provided.

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To jail, or not to jail

The narrative

Attorneys for former FTX group executive Caroline Ellison argue she shouldn't spend any time in prison after cooperating with prosecutors, FTX's bankruptcy estate and FTX's creditors. Prosecutors did not provide a specific recommendation, but moved for a below-guidelines sentence.

Why it matters

Caroline Ellison was the CEO of Alameda Research who, in her own words, doctored balance sheets that the FTX group sent to companies that loaned FTX money as part of an effort to hide its actual financial status. On Tuesday, a federal judge will decide if she goes to prison and how much time she'll spend behind bars, if any.

Breaking it down

Caroline Ellison ran Alameda Research under Sam Bankman-Fried, who was also briefly her romantic partner. Alongside other FTX executives, she was arrested shortly after the company's collapse, and pled guilty to fraud and conspiracy charges in December 2022.

Bankman-Fried, who was convicted on identical charges late last year, was sentenced to 25 years in prison after the government's probation office recommended over 100 years based on sentencing guidelines. Ellison's pre-sentence investigation report recommended three years of probation and time served – meaning no prison time – her attorneys said earlier this month.

Ellison's attorneys also argued that she shouldn't spend any time in prison, citing her cooperation with the Department of Justice – including her testimony against Bankman-Fried – and her work to help creditors and FTX's bankruptcy estate recover funds. As part of their sentencing memorandum, Ellison's attorneys included letters from John J. Ray III, the current CEO of FTX and attorneys for FTX's creditors (alongside the usual selection of supportive notes from friends and family).

The DOJ did not provide a specific sentencing recommendation, unlike with Bankman-Fried (who prosecutors said should spend 40 or 50 years behind bars, below the probation office's 100-year recommendation). Instead, prosecutors said they would make a motion under Section 5K1.1 of the sentencing guidelines, which means they recommend a sentence below the guidelines calculation.

"What is particularly unusual about the speed of Ellison’s cooperation is how many times she met with the Government in a short span of time, and how quickly she pleaded guilty to the full slate of misconduct related to her participation in a complex financial fraud," the DOJ filing said. "That required numerous lengthy meetings with the Government in short succession, as well as a mindset that she was prepared to be fully candid with the Government from the outset of her cooperation, and accept complete responsibility for her crimes without minimization or evasion."

The remaining wild card is Judge Lewis Kaplan, who oversaw last year's trial and was a firsthand witness to Ellison's testimony.

Kaplan sentenced Ryan Salame, the former CEO of FTX Digital Markets, to more than seven years in prison earlier this year. Like Ellison, Salame pled guilty to criminal charges, but unlike her, he did not testify or provide the same cooperation. He also faced different charges, but his sentence suggests the extreme upper bound for Ellison, if she does go to prison, will be a few years.

Following Ellison, former FTX executives Nishad Singh and Gary Wang are the remaining two executives who will be sentenced. Ellison's sentence will likely be a strong signal for how much time they may actually face, given the similar circumstances for all three individuals.

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Coinbase v. SEC

A few years ago, Coinbase filed a petition to try and force the U.S. Securities and Exchange Commission to engage in rulemaking around digital assets. The regulator pushed back, saying no bespoke rulemaking was necessary at the time.

On Monday, a federal appeals court heard arguments from both the SEC and Coinbase in this ongoing effort. Eugene Scalia, a partner with Gibson Dunn, argued that the appeals court should compel the SEC to explain how they define digital assets (or transactions with digital assets) as securities and explain how those rules might be workable.

"The SEC, having made registration a priority itself, needs to address immediately the fact that registration is not possible," Scalia said.

Ezekiel Hill, an SEC attorney, pushed back, saying that Coinbase's filing before the court doesn't rise to the "rare circumstances" that would allow the court to force the regulatory agency to conduct a rulemaking process.

Hill argued that the SEC wasn't obligated to create a specific framework for cryptocurrencies, and there are already companies that comply with federal securities laws. For crypto, the SEC has looked to the Howey Test, he said.

"The securities framework is not premised on compliance being possible," Hill said. "It balances a number of interests, including investor protection, fair and efficient markets, capital formation, and not everybody who comes and wants to participate in a securities marketplace is able to do what they want to do. That's not a unique issue to digital asset securities."

The judges grilled Hill more than Scalia over the course of the hearing, but it's unclear how they might rule.

One interesting note: Hill repeatedly referred to "digital asset securities" – a term the SEC told a D.C. judge it would stop using a few weeks ago – though he did say later in the hearing that "the digital asset is not the security," but it "can be the subject of an investment contract."

This week

Monday

• 19:00 UTC (3:00 p.m. EDT) The Third Circuit Court of Appeals heard arguments from Coinbase and the U.S. SEC over Coinbase's petition to force rulemaking.

Tuesday

• 14:00 UTC (10:00 a.m. EDT) The five SEC commissioners will testify before the House Financial Services Committee.
• 19:00 UTC (3:00 p.m. EDT) Former Alameda Research CEO Caroline Ellison will be sentenced.

Wednesday

• 14:00 UTC (10:00 a.m. EDT) SEC Chair Gary Gensler was supposed to testify before the Senate Banking Committee, but this hearing was postponed early Tuesday. A new time and date have yet to be announced.

Elsewhere:

• (The Wall Street Journal) The Journal took a look at Vice President Kamala Harris' engagement with business leaders in her bid for president.
• (The Air Current) Boeing, on top of concerns about its internal processes and whether its aircraft are safe, is now dealing with a strike from more than 30,000 employees hoping for a restoration of pension benefits and other benefits (disclosure: I have Boeing stock and Airbus ADRs in my portfolio).

If you’ve got thoughts or questions on what I should discuss next week or any other feedback you’d like to share, feel free to email me at [email protected] or find me on Twitter @nikhileshde.

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See ya’ll next week!