Will Caroline Ellison get jail time for her role in the $11 billion FTX fraud scheme? Here's what the judge must weigh.

• Caroline Ellison is set to be sentenced Tuesday for her role in the $11 billion FTX fraud scheme.
• Prosecutors and her lawyers both asked for zero time behind bars — but it's up to the judge.
• Ex-prosecutors think she'll likely get it, but the judge might want to send a message with jail.

On Tuesday, a judge will decide what sentence to give Caroline Ellison, who pleaded guilty to conspiring with Sam Bankman-Fried in an $11 billion fraud scheme.

Earlier this year, US District Judge Lewis Kaplan sentenced Bankman-Fried to 25 years in prison.

But both prosecutors and Ellison's lawyers have asked for her to spend zero time behind bars, putting the judge in a potentially vexing position.

She was the star witness in Bankman-Fried's criminal trial. Ellison's testimony spanned three days last October in a downtown Manhattan courtroom about how she and Bankman-Fried used Alameda Research, his hedge fund, to invest billions of dollars worth of assets secretly siphoned from customers of FTX, the cryptocurrency exchange he controlled.

Judges often describe criminal sentencing as the most challenging part of their jobs. They must decide whether to take away a person's freedom, and how much of it. Ellison's sentencing sets up a high-stakes balancing test.

On one hand, as the CEO of Alameda Research, Ellison was a participant in one of the biggest fraud schemes in history. But Kaplan must also weigh the detailed filings from prosecutors and her lawyers, which each make the case for no prison time. They say Ellison was under Bankman-Fried's sway amid their on-and-off romantic relationship, that there is virtually no risk of recidivism, and that she has already been punished through excruciating public scrutiny.

"Numerous films and TV shows are in production about the downfall of FTX, which will only perpetuate the public scrutiny Ellison has faced to date," prosecutors wrote in a filing before the sentencing hearing. "The Government cannot think of another cooperating witness in recent history who has received a greater level of attention and harassment."

At the same time, Kaplan must weigh Ellison's actual conduct. She still participated in a massive fraud scheme, after all, the value of which he put at $11 billion. The judge needs to consider general deterrence and public confidence in the judicial system. What kind of message does it send if you can get no time in prison for participating in a massive fraud by deciding to cooperate once things go south?

Also on the scale are the needs of prosecutors, who want to woo cooperators in other cases by dangling the possibility of lower sentences. If cooperators get big sentences, then they have less incentive to cooperate.

Kaplan has a reputation for handing down tough sentences. But two former federal prosecutors told Business Insider that Ellison will likely get zero time behind bars.

Ellison was a sterling example of a cooperator, and judges — especially in New York, where there are many white-collar cases — typically give that a lot of weight, according to Sarah Krissoff, a former Brooklyn federal prosecutor who oversaw financial fraud cases.

"She was essential to them. They needed her," Krissoff, now a defense attorney at Cozen O'Connor, told BI. "And she came through, and she withstood her three days of testimony, and she was clearly credible."

Joshua Naftalis, a former Manhattan federal prosecutor who oversaw securities fraud and cryptocurrency-related investigations, told BI that it's "typical though not guaranteed" for people in Ellison's situation to get no prison time. He noted that she "fully cooperated" and received "a glowing letter" from prosecutors.

"That's basically the business transaction of a cooperating witness with the government," Naftalis, now a defense lawyer at Pallas LLP, told BI. "Which is: you faced a potential large jail time for an enormous fraud, and if you cooperate and do a great job, there is a really good chance that you don't go to jail."

"That's basically the deal," he added.

The big difference in Ellison's case is the sheer size of the fraud, which has few precedents in the annals of white-collar crime.

"The court is going to have to grapple with the enormous size of the fraud and her role," Naftalis said. "And whether all of that notwithstanding, her extraordinary cooperation and acceptance of responsibility is enough to make him comfortable that no jail is required."

Ellison was the SBF trial's star witness

Ellison pleaded guilty to fraud and money laundering for her role in the FTX scandal. As the CEO of Alameda Research, she used the funds stolen from FTX customers to make risky investments and cryptocurrency bets, and worked with Bankman-Fried to deceive Alameda's lenders and investors.

At the trial, she testified about some of the ways she and Bankman-Fried kept the lid on how they took billions of dollars from FTX customers. Prosecutors spent a lot of time on a seven-tab spreadsheet she prepared, presenting different versions of an Alameda Research balance sheet that would best deceive investors and lenders about where their money came from.

As FTX collapsed in November 2022, Ellison was quick to come clean with employees at Alameda Research, telling them at an all-hands meeting that the crypto firm took customer money.

Prosecutors, in their sentencing letter, praised Ellison for helping them identify the key documents that would help their case against Bankman-Fried, and for cooperating with civil investigations from the Securities Exchange Commission and the Commodity Futures Trading Commission. John J. Ray III, who took over FTX as CEO to sort through its smoldering ruins during the bankruptcy process, also wrote a letter to the court praising her cooperation.

"Ellison stood out not only for the speed of her cooperation, but for her consistent candor beginning in her very first meeting with the Government," prosecutors wrote. "She accepted full responsibility from her very first proffer and did not minimize or shift blame."

In her sentencing submission, Ellison's lawyers wrote that she had been living a quiet life since the trial, working on a novel and helping her parents — both economists affiliated with MIT — with a math textbook. In emotional letters, her parents and friends recounted a moment when she comforted a close friend whose father had killed himself.

Kaplan previously gave a 7½-year sentence to Ryan Salame, an FTX executive who pleaded guilty to charges against him but who was not a cooperating witness in Bankman-Fried's trial. The sentence was longer than what prosecutors recommended, and Kaplan is now considering whether to revoke Salame's guilty plea, accusing him of lying under oath in an earlier court proceeding.

Ellison's sentence will likely give a preview of the sentences for Gary Wang and Nishad Singh, two former FTX executives who also pleaded guilty to charges against them and testified against Bankman-Fried at trial. Their respective sentencing hearings are scheduled for later in the fall.

"This sentence will set the market," Naftalis told BI.

Ellison's lawyers pointed out that Kaplan praised Ellison's testimony during Bankman-Fried's sentencing hearing, finding it helpful for understanding his motivations. (Bankman-Fried is appealing his conviction and sentence.)

Because the Bankman-Fried case went to trial, Kaplan has a lot of information at his disposal when deciding Ellison's sentence. The judge listened to her testimony and observed her courtroom demeanor. It's different than a case where everyone pleads guilty and the judge has a smaller court to use in their sentence, Krissoff observed.

"He has so much input already into what the sentence should be," Krissoff said. "You have an uber-informed judge at this point."