SEC charges and settles with crypto-focused Galois Capital over custody issues

The U.S. Securities and Exchange Commission has charged and subsequently settled with crypto-focused investment advisory firm Galois Capital over issues with how it held client assets.

The charges involved a private fund that mostly invested in crypto, the SEC said in a statement on Tuesday.

“By failing to comply with Custody Rule provisions, Galois Capital exposed investors to risks that fund assets, including crypto assets, could be lost, misused, or misappropriated,” said Corey Schuster, co-chief of the SEC Enforcement Division’s Asset Management Unit, in a statement. “We will continue to hold accountable advisers who violate their core investor protection obligations.”

Starting in July 2022, Miami-based Galois failed to make sure that certain crypto held by the private fund it advised were “maintained with a qualified custodian,” the SEC said. Galois held certain crypto with crypto platforms, including FTX Trading LTD., which was not a qualified custodian, the agency added. 

Galois Capital was heavily affected by the swift breakdown of FTX a few years ago. FTX filed for bankruptcy protection in November 2022 and its top executives, including former CEO Sam Bankman-Fried were criminally charged. 

About half of the fund’s assets under management for a few weeks in November 2022 were lost following the collapse of FTX, the SEC said. Galois later shut down in Feburary 2023. 

Galois did not admit or deny the SEC’s findings and agreed to cease and desist from future violations of the Advisers Act and agreed to pay $225,000 in penalties. 

The SEC also said Galois misled its fund investors about “the notice period required for redemptions.” The Galois Capital Alpha Fund LP required 30 days written notice for investors to redeem unless the fund’s general partner allowed for shorter notice, though some investors were allowed to redeem with short notice, the SEC said. 

“Galois had an informal practice of permitting redemptions with at least five business days’ notice before month end, which was communicated to certain investors, including investors who asked about the redemption notice period or submitted redemption requests with less than 30 days’ notice,” the SEC said in its order. “However, Galois allowed certain Fund investors to redeem with less than five business days’ notice.”

Galois’ move to allow certain investors to redeem was misleading, the SEC added. 

Update: Sept. 3, 4:45 p.m. UTC to include more details

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