Summary:
- SEC Charges: The U.S. Securities and Exchange Commission (SEC) has charged Galois Capital Management with failing to properly secure client assets, particularly those held with the now-defunct crypto exchange FTX.
- Custody Rule Violation: Galois allegedly violated the SEC’s custody rule, which requires investment advisers to store client funds with a qualified custodian.
- Impact of FTX Collapse: Galois lost nearly half of its assets in the FTX collapse in November 2022, which was triggered by a severe liquidity crisis and allegations of fraud.
- Civil Penalty: Galois has agreed to pay a $225,000 civil penalty, which will be distributed to the fund’s harmed investors.
The United States Securities and Exchange Commission (SEC) has charged Galois Capital Management, a Florida-based fund adviser, with violations of the SEC’s custody rule after the firm failed to properly secure client assets, including those held with the now-defunct cryptocurrency exchange FTX. The charges, announced on September 3, highlight the risks involved in managing digital assets and the importance of adhering to regulatory standards.
According to the SEC, Galois Capital Management held cryptocurrency assets in online trading accounts across various crypto exchanges, including FTX Trading Ltd. The SEC’s custody rule mandates that investment advisers must store client funds with a qualified custodian, such as a registered broker-dealer or bank. However, the SEC alleges that Galois failed to ensure that these assets were secured in accordance with the rule.
The situation was exacerbated in November 2022, when FTX collapsed due to a severe liquidity crisis, coupled with allegations of mismanagement and fraud. The collapse resulted in billions of dollars in customer funds becoming inaccessible, leading to FTX’s bankruptcy. Galois Capital, which had substantial assets stored with FTX, reportedly lost nearly half of its assets as a result of the exchange’s downfall.
In addition to the custody rule violation, the SEC also accused Galois of misleading its investors regarding the notice period required for redemptions. The firm allegedly informed some investors that they needed to provide at least five business days’ notice before the end of the month to redeem their investments, while allowing others to redeem with less notice, creating inconsistencies in how investors were treated.
As part of the resolution, Galois Capital Management has agreed to pay a civil penalty of $225,000. The SEC stated that this penalty would be distributed to the fund’s harmed investors.
This case underscores the importance of robust custodial practices, particularly in the volatile cryptocurrency sector. It also serves as a reminder to investment advisers of their obligations under the SEC’s regulations, especially when dealing with emerging asset classes like digital currencies.
Disclaimer:
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