SEC charges Galois Capital for FTX-linked custody violations

Vivian Nguyen

Sep. 3, 2024

Approximately half of the firm's assets were lost due to the collapse of FTX.

SEC charges Galois Capital for FTX-linked custody violations

Key Takeaways

Galois Capital failed to use a qualified custodian for crypto assets, violating the Custody Rule.
The firm misled investors about redemption policies, favoring some over others.

The US Securities and Exchange Commission (SEC) has charged Galois Capital Management, a former registered investment adviser, with violations of the Investment Advisers Act. The SEC found that the firm held certain crypto assets in online trading accounts on FTX Trading, which was not a qualified custodian.

Galois Capital’s exposure to FTX ultimately led to the loss of approximately half of the fund’s assets under management when FTX collapsed in late 2022, said the SEC in a Tuesday press release.

The SEC also found that Galois Capital misled investors about the redemption notice period, allowing some investors to redeem with shorter notice than others.

As part of the settlement, Galois Capital will pay a $225,000 fine, which will benefit the harmed investors. The firm also received formal censure, and was issued a cease and desist order, prohibiting future violations of the Investment Advisers Act.

Corey Schuster, Co-Chief of the SEC Enforcement Division’s Asset Management Unit, stressed the importance of compliance with investor protection laws, stating:

“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.”

Galois Capital was a prominent player in the crypto hedge fund sector, known for its trading strategies and market insights. It was co-founded by Kevin Zhou, who became renowned for making contrarian market bets including an early warning about Terra’s collapse.

FTX’s collapse led to major challenges for Galois Capital. The company reported losses of around $40 million and had to wind down operations and return investor capital.

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