The US Securities and Exchange Commission (SEC) recently charged and settled with hedge fund Galois Capital Management LLC over a private fund managed by the firm that primarily invested in crypto. The charges are related to Galois Capital allegedly failing to comply with client asset safeguarding requirements, particularly crypto assets that were categorized as securities. As a result, Galois Capital has agreed to pay a $225,000 civil penalty to settle the charges, with the amount being distributed to harmed investors.
The SEC found that Galois Capital violated the Investment Advisers Act’s Custody Rule by not securing its assets with a qualified custodian. Instead, the firm held digital assets in online trading accounts on platforms like FTX, which were not recognized as qualified custodians. This decision led to approximately half of the fund’s assets under management being lost when FTX collapsed in November 2022.
Furthermore, the SEC’s order revealed that Galois Capital misrepresented redemption notice periods by claiming a five-business-day notice requirement while allowing some investors to redeem with shorter notice periods. This deceptive practice put investors at risk and violated core investor protection obligations as per the SEC Enforcement Division’s Asset Management Unit.
With the charges against them, Galois Capital has agreed to cease further violations of the Advisers Act, accept the censure, and pay the imposed civil penalty. However, the firm has not admitted or denied the findings made by the SEC. Following these events, Galois Capital co-founder Kevin Zho disclosed that roughly $40 million in funds were locked up in FTX after the exchange froze customers’ withdrawals.
End of Operations
Despite gaining notoriety in 2022 for predicting the collapse of the Terra ecosystem, Galois Capital faced financial challenges. Four months after revealing the extent of funds stuck on FTX, the hedge fund closed its operations and sold its claims on the platform for 16 cents on the dollar. In an attempt to ease the situation for investors, Galois Capital outlined a payment plan that would see clients receive up to 90% of funds not retained on FTX, with the remaining 10% being withheld until the auditing process is complete.
The SEC’s charges against Galois Capital Management highlight the importance of compliance with regulations and investor protection obligations in the asset management industry. The repercussions faced by the hedge fund serve as a cautionary tale for other firms operating in the crypto investment space, emphasizing the need for transparency, accountability, and adherence to regulatory standards.
Leave a Reply