By Luc Cohen

NEW YORK (Reuters) - Former cryptocurrency executive Caroline Ellison was sentenced by a federal judge on Tuesday to two years behind bars for her role in her imprisoned former boyfriend Sam Bankman-Fried's theft of about $8 billion in customer funds from the now-bankrupt FTX exchange he founded.

U.S. District Judge Lewis Kaplan decided at a sentencing hearing in Manhattan federal court that prison time was warranted for Ellison despite her cooperation with prosecutors.

Ellison, 29, pleaded guilty to seven felony counts of fraud and conspiracy and testified as a prosecution witness in the trial of Bankman-Fried, who was convicted of fraud and other charges last year and is serving a 25-year prison sentence arising from FTX's November 2022 collapse.

The crimes to which she pleaded guilty carried a maximum sentence of 110 years in prison.

Kaplan during the hearing told Ellison she was "gravely culpable in this fraud - there is no doubt about it." But Kaplan said her "remarkable cooperation" represented a "fundamental distinction" between her and Bankman-Fried.

"She cooperated, and he denied the whole thing," Kaplan said. "He went to trial, as was his right, and it didn't work out so well. The reason it didn't work out so well, in some significant part, is that Ms. Ellison cooperated."

"I've seen a lot of cooperators in 30 years here (as a judge). I've never seen one quite like Ms. Ellison," Kaplan added. "I don't remember a single time when she was caught with the slightest error of fact, the slightest inconsistency."

Ellison addressed the judge during the hearing.

"Not a day goes by when I don't think about all the people I hurt," said Ellison, a Stanford University graduate whose parents and two sisters were present in court. "My brain can't even truly comprehend the scale of the harms I've caused. That doesn't mean I don't try."

Prosecutors have called Bankman-Fried's actions one of the biggest financial frauds in U.S. history. Ellison from 2021-2022 ran Alameda Research, a cryptocurrency-focused hedge fund Bankman-Fried founded. Ellison said she thought about leaving Alameda many times.

"Every time I thought about it, I heard Sam's voice in my head," Ellison told the judge.

"Ignoring that voice in my head and speaking out would have been brave," Ellison said, beginning to choke up and sniffle. "I'm sorry I wasn't brave."

Ellison spoke with a rapid pace at a lectern, reading from a prepared statement. She returned to her seat at the defense table when she finished, wiping her nose with a tissue.

Her lawyers had argued that Ellison should get no prison time due to her cooperation with prosecutors. Without recommending a specific prison term, the U.S. Attorney's office in Manhattan, which brought the charges, urged Kaplan to go easy on Ellison, citing her "extraordinary" cooperation and expression of remorse.

Prosecutor Danielle Sassoon told the judge that it was important to "distinguish between the mastermind of the criminal scheme," meaning Bankman-Fried, "and the willing accomplice," meaning Ellison.

"I cannot overstate the importance of Ms. Ellison's testimony in convicting Sam Bankman-Fried," Sassoon said.

Prosecutors said Ellison met with them about 20 times to help them piece together FTX's unraveling and make their case against Bankman-Fried.

"Unlike Bankman-Fried, she is not cunning. There is no evidence she was driven by greed, or that an appetite for risk or power was part of her nature," Sassoon told the judge.

'HONESTY AND OPENNESS'

Anjan Sahni, Ellison's lawyer, said during the hearing that sparing Ellison from prison time "would send a powerful message about the value of timely, honest and full cooperation with the government in cases of financial crime."

Sahni said Ellison spoke honestly both in interviews with prosecutors and in her testimony about her actions and her relationship with Bankman-Fried.

"She didn't shy away from the details, however embarrassing they were," Sahni told the judge. "Her honesty and openness (were) ultimately critical to the government's case."

Sahni spoke of the dynamics of the relationship Ellison had with Bankman-Fried.

"She had a crush on him from the beginning, and then she saw him achieve staggering levels of success," Sahni said. "It was genuinely thrilling for her when he expressed romantic interest."

"He wasn't hesitant about taking advantage of the power that he had over her," Sahni added.

Nishad Singh and Gary Wang, two other former FTX executives who cooperated with prosecutors, are scheduled to be sentenced on Oct. 30 and Nov. 20, respectively.

Bankman-Fried, 32, rode a boom in cryptocurrency prices during the COVID pandemic to a net worth of, according to Forbes magazine, $26 billion by October 2021. He gained prominence as a generous donor to philanthropic causes and Democratic politicians.

His wealth evaporated when FTX collapsed in November 2022 amid a flurry of customer withdrawals. Bankman-Fried was charged a month later with stealing FTX customer funds to plug losses at Alameda. Ellison pleaded guilty in December 2022.

Bankman-Fried is appealing his conviction and sentence, arguing that Kaplan wrongly excluded evidence showing he thought FTX had enough funds to cover customer withdrawals. In testifying in his own defense at trial, Bankman-Fried admitted to making mistakes while running FTX, but denied stealing money.

Ellison testified over three days at Bankman-Fried's trial, telling the jury he directed her and others to take money from FTX's customers without their knowledge.

(Reporting by Luc Cohen in New York; Editing by Will Dunham)