The US Securities and Exchange Commission (SEC) has filed charges and reached a settlement with hedge fund Galois Capital Management LLC over a private fund managed by the firm that invested primarily in crypto, according to a statement published on September 3.
The SEC’s charges allege Galois Capital failed to comply with requirements to protect client assets, specifically cryptocurrencies offered as securities by the regulator.
Settlement
Galois Capital agreed to pay a $225,000 civil penalty to settle the charges, which will be distributed to the injured investors.
Corey Schuster, co-head of the SEC Enforcement Division’s Asset Management Unit, stated:
“By failing to comply with the Custody Rule provisions, Galois Capital exposed investors to risks that fund assets, including crypto assets, could be lost, misused or misappropriated.”
Schuster added that the regulator will continue to hold advisors accountable for violating their “core investor protection obligations.”
The SEC found that as of July 2022, Galois Capital violated the Custody Rule of the Investment Advisers Act by failing to safeguard its assets with a qualified custodian.
The company held the digital assets in online trading accounts on platforms such as FTX, which were not qualified custodians. About half of the fund’s assets under management were lost when the FTX collapsed in November 2022.
The SEC’s order also found that Galois Capital misrepresented redemption notice periods, requiring five business days’ notice while giving some investors the option to redeem with shorter notice.
Galois Capital agreed to cease further violations of the Advisers Act, accept the censure and pay the civil penalty imposed without admitting or denying the findings.
Nearly $40 million lost in the collapse of the FTX
Kevin Zho, co-founder of Galois Capital, revealed on November 12, 2022 that around $40 million in funds were locked up in FTX after the exchange froze client withdrawals. The hedge fund rose to prominence in 2022 for predicting the collapse of the Terra ecosystem.
Four months after Galois Capital shared how much was tied up in FTX, it shut down operations and sold its claims on FTX for about 16 cents on the dollar.
Following the end of its operations, Galois Capital unveiled a payment plan that consists of paying clients up to 90% of the funds not retained in FTX, while the remaining 10% would be withheld until the hedge fund’s audit process is completed.
