The SEC has charged the crypto hedge fund Galois Capital Management with serious violations related to the custody of client assets, following the collapse of cryptocurrency exchange FTX.
The charges, announced on September 3, focus on the fund adviser’s failure to protect investor funds properly by holding them with a non-qualified custodian.
The SEC alleges that Galois Capital held significant amounts of cryptocurrency with FTX, which was not a registered custodian.
When FTX failed in November 2022 due to a liquidity crisis and fraud allegations, Galois Capital lost approximately half of its assets.
The fund’s failure to adhere to SEC custody rules, which require client funds to be held by qualified entities like registered broker-dealers or banks, put investors’ assets at high risk of loss or misuse.
Additionally, the SEC claims that Galois misled investors about the redemption notice period.
While some investors were told they needed to give at least five business days’ notice before redeeming their investments, others were allowed to redeem with less notice, creating inconsistency and potential unfair treatment.
As part of the settlement, Galois Capital has agreed to pay a civil penalty of $225,000, which will be distributed to affected investors.
