The U.S. Securities and Exchange Commission (SEC) announced a settlement of charges against crypto hedge fund Galois Capital for failing to comply with and protect its underlying assets (including cryptocurrencies). Galois agreed to pay a civil penalty of $225,000, which will be distributed among its fund investors who suffered losses.
Galois Capital is a hedge fund focused on cryptocurrency trading. Some of its assets were damaged in the FTX crash, and it eventually decided to close the fund in February 2023 and return the remaining funds to investors.
The SEC's investigation found that, beginning in July 2022, Galois Capital violated the custody rules of the Investment Advisers Act by failing to ensure that certain crypto assets held by private equity funds it advised were held by qualified custodians. Galois Capital holds some crypto assets in online trading accounts of crypto asset trading platforms including FTX Trading Ltd., and these crypto assets are not eligible for custody. About half of the fund's assets under management were lost in early to mid-November 2022 due to the FTX collapse. Additionally, Galois Capital misled certain investors by telling them that redemptions required at least five business days’ notice before the end of the month, but allowed other investors to redeem with advance notice.
Corey Schuster, co-director of the Asset Management Section of the SEC's Enforcement Division, said:
By failing to comply with custody rules, Galois Capital exposes investors to the risk of possible loss, misuse or misappropriation of fund assets, including crypto-assets. We will continue to hold advisers accountable who breach our core obligations to protect investors.
The SEC determined that Galois Capital violated the Investment Advisers Act, and Galois agreed to pay a civil penalty of $225,000, which will be distributed to its fund investors who suffered losses.
According to previous reports , Galois Capital manages more than $200 million in assets. After FTX went bankrupt in November 2022, the company decided to stop all trading, close all positions, and return 90% of the funds that were not trapped on FTX to customers after closing the fund, and then also sold the fund's interest in FTX. Debt.
Although private equity funds do not have to undergo strict SEC review before being listed like ETFs, this case shows that the custody issue of crypto assets has received the attention of the competent authorities. This is also the custody issue in almost all Bitcoin and Ethereum spot ETFs. All are handled by Coinbase, a listed compliance exchange. Although Galois Capital had already liquidated its funds, it was fined by the SEC more than a year later, which also sounded a wake-up call to other industry players.
