Galois Capital hit with SEC charges for failing custody requirements

The US Securities and Exchange Commission (SEC) has charged and settled with hedge fund Galois Capital Management LLC over a private fund managed by the firm that primarily invested in crypto, according to a statement published on Sept. 3.

The SEC charges are related to Galois Capital allegedly failing to comply with client asset safeguarding requirements, particularly crypto that the regulator labeled were offered as securities.

Settlement

Galois Capital agreed to pay a $225,000 civil penalty to settle the charges, which will be distributed to harmed investors.

Corey Schuster, Co-Chief of the SEC Enforcement Division’s Asset Management Unit, stated:

“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.”

Schuster added that the regulator will continue to hold advisers accountable for violating their “core investor protection obligations.”

The SEC found that from July 2022, Galois Capital violated the Investment Advisers Act’s Custody Rule by not securing its assets with a qualified custodian.

The firm held the digital assets in online trading accounts on platforms like FTX, which were not qualified custodians. Approximately half of the fund’s assets under management were lost when FTX collapsed in November 2022.

The SEC’s order also revealed that Galois Capital misrepresented redemption notice periods, claiming a five-business-day notice requirement while allowing some investors to redeem with shorter notice.

Galois Capital consented to cease further Advisers Act violations, accept the censure, and pay the imposed civil penalty without admitting or denying the findings.

Nearly $40 million lost in FTX collapse

Galois Capital co-founder Kevin Zho revealed on Nov. 12, 2022, that roughly $40 million in funds were locked up in FTX after the exchange froze customers’ withdrawals. The hedge fund gained notoriety in 2022 for predicting the collapse of the Terra ecosystem.

Four months after sharing how much has been stuck on FTX, Galois Capital shut down its operations and sold its claims on FTX for roughly 16 cents on the dollar.

Following the end of its operations, Galois Capital revealed a payment plan consisting of paying clients up to 90% of the funds not retained on FTX, while the remaining 10% would be withheld until the hedge fund’s auditing process is finalized.

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