The U.S. Securities and Exchange Commission (SEC) has announced that it has settled charges against Florida-based Galois Capital Management LLC, a former registered investment adviser for a private fund focused on crypto assets. Galois Capital was charged with failing to comply with regulations concerning safeguarding client assets, including crypto assets considered securities.
Short Narrative
Galois Capital, the crypto hedge fund that famously warned of the dangers around Terra’s LUNA and UST ahead of their 2022 collapse, has been charged by the SEC for misleading investors and for not properly safeguarding customer funds. The firm, which shut down in early 2023 after being impacted by the downfall of crypto exchange FTX, has settled the charges.
The SEC found that beginning in July 2022, Galois Capital failed to ensure that certain crypto assets held by the private fund that it advised were maintained with a qualified custodian, a violation of the Investment Advisers Act’s Custody Rule. The SEC also found that Galois misled investors about the notice period required for redemptions. To settle these charges, Galois Capital agreed to pay a civil penalty of $225,000, which will be distributed to the fund’s harmed investors.
Key Points
- The Case: U.S. SEC v. Galois Capital Management LLC
- The Respondent: Galois Capital Management LLC
- Custody Rule Violations: Since July 2022, Galois Capital failed to ensure that certain crypto assets held by its advised private fund were maintained with a qualified custodian. Instead, these assets were held in online trading accounts on platforms such as FTX Trading Ltd., which were not qualified custodians under SEC rules.
- Asset Losses: Approximately 50% of the fund’s assets under management were lost between early to mid-November 2022 due to the collapse of FTX, where the crypto assets were held.
- Misleading Redemption Practices: Galois Capital misled some investors by stating that redemptions required at least five business days’ notice before month-end, while permitting other investors to redeem with less notice, creating inconsistency and unfair practices.
- Regulatory Violations: Galois Capital was found to have violated the Investment Advisers Act by failing to adhere to its core investor protection obligations.
Actionable Insight
The SEC’s charges against Galois Capital underscore the importance of compliance with custody and investor protection rules, especially in the crypto asset space. Advisers and fund managers must ensure that all client assets, including digital assets, are held with qualified custodians to protect against loss, misuse, or misappropriation.
This case highlights the ongoing scrutiny by regulators to enforce transparency and accountability in managing client funds. It serves as a critical reminder for all investment advisers, particularly those dealing with crypto assets, to adhere strictly to regulatory requirements to avoid legal and financial penalties.
