In recent news, the U.S. Securities and Exchange Commission has imposed additional charges against Galois Capital, a crypto-focused advisory firm that held client assets at FTX. As a result of its actions, Galois has agreed to pay a civil penalty of $225,000, which will be distributed to investors who suffered harm as a result of the firm’s misconduct. According to the SEC’s press release, it was discovered that Galois failed to ensure that the crypto assets held by the private fund they were advising were held with a qualified custodian. Instead, these assets were placed with unqualified crypto trading platforms, such as FTX.
The consequences of these actions were severe, with approximately half of the fund’s assets under management being 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. Subsequent investigations and trials revealed that massive fraud had taken place, with executives engaging in unauthorized trading and misappropriation of customer funds with FTX’s sister trading desk, Alameda Research. This collapse not only affected Galois but also triggered a chain reaction of bankruptcies for other firms that had placed their trust in FTX, including BlockFi, Genesis, and Gemini Earn.
The SEC’s findings also highlighted instances where Galois misled investors by providing conflicting information regarding withdrawal processes. While some investors were led to believe that withdrawals required a five-day notice before month-end, others were able to redeem their investments with shorter notice periods. This lack of transparency exposed investors to risks of potential loss, misuse, or misappropriation of fund assets, including crypto assets. Corey Schuster, Co-Chief of the SEC Enforcement Division’s Asset Management Unit, emphasized the importance of holding advisers accountable for violating investor protection obligations.
As part of the settlement, Galois agreed to pay the civil penalty without admitting or denying the allegations. Additionally, the firm agreed to an order that prevents it from engaging in further violations of the Investment Advisers Act. In response to these developments, Galois Capital took to Twitter to express relief at putting the matter with the SEC behind them. The firm claimed that it had utilized Fireblocks as its crypto custodian, despite Fireblocks not being a qualified custodian. Galois defended its decision by stating that Fireblocks was chosen as the best solution for their needs and the safest way to secure crypto for investors at the time.
The case of Galois Capital serves as a stark reminder of the importance of proper management and custody of client assets in the crypto industry. Regulatory oversight and adherence to investor protection obligations are critical to maintaining trust and integrity within the sector. Firms must prioritize transparency, accountability, and compliance to avoid facing similar consequences in the future.
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