The recent charges levied by the U.S. Securities and Exchange Commission against Galois Capital, a crypto-focused advisory firm that custodied client assets at FTX, have highlighted significant shortcomings in the firm’s practices. In response to the SEC’s findings, Galois has agreed to pay a civil penalty of $225,000, which will be distributed to investors who were harmed by the fund’s actions. The SEC determined that Galois failed to ensure that the crypto assets held by the private fund it was advising were held with a qualified custodian, instead choosing to store them with unqualified crypto trading platforms such as FTX.
According to the SEC’s press release, approximately half of the fund’s assets under management were lost in connection with the collapse of FTX. This event marked the largest corporate crypto failure in history, resulting in losses of $8 billion for customers and $1.7 billion for investors. During the subsequent trial of FTX’s CEO, Sam Bankman Fried, it was revealed that he and other executives had engaged in massive fraud, including secretly trading and losing customer funds through FTX’s sister trading desk, Alameda Research. The fallout from FTX’s collapse led to widespread contagion, resulting in bankruptcies of other firms that had placed their trust in FTX, such as BlockFi, Genesis, and Gemini Earn.
In addition to its mishandling of client assets, the SEC also found that Galois misled investors by providing conflicting information regarding withdrawal procedures. While some investors were told that withdrawals required five business days’ notice before the end of the month, others were allowed to redeem their investments on shorter notice. This inconsistency exposed investors to the risk that fund assets, including crypto assets, could be lost, misused, or misappropriated. Corey Schuster, Co-Chief of the SEC Enforcement Division’s Asset Management Unit, emphasized the importance of holding advisers accountable for violating their core investor protection obligations.
In response to the SEC’s allegations, Galois chose to settle the charges without admitting or denying guilt. The firm agreed to pay the civil penalty and accepted an order preventing it from committing further violations of the Investment Advisers Act. Despite claiming to have used Fireblocks as its crypto custodian, Galois faced criticism for relying on a non-qualified custodian for safeguarding client assets. While Fireblocks is a prominent infrastructure provider in the crypto space and counts former SEC chair Jay Clayton among its advisors, the SEC emphasized the importance of working with qualified custodians to protect investor interests.
The fallout from the SEC charges against Galois Capital serves as a stark reminder of the risks associated with mismanagement and misconduct in the crypto industry. Investors must remain vigilant and conduct thorough due diligence to ensure that their assets are held in a secure and compliant manner. Regulatory oversight plays a crucial role in holding firms accountable for their actions and safeguarding the interests of investors in an ever-evolving market landscape. As the crypto industry continues to grow and attract increased scrutiny, firms like Galois Capital must prioritize investor protection and regulatory compliance to maintain trust and credibility in the market.
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