SEC Charges Galois Capital for Custody Failures
The US Securities and Exchange Commission (SEC) recently brought charges against Galois Capital Management LLC for custodial and disclosure failures that detrimentally impacted its investors. According to an SEC press release, Galois Capital has agreed to pay $225,000 to the agency for the benefit of affected investors.
Galois Capital, a former investment advisor overseeing a private fund invested in crypto assets, neglected to ensure that specific crypto assets were securely held with a qualified custodian, breaching the Investment Advisors Act’s Custody Rule. The SEC’s investigation revealed that some of Galois’ assets were held in online trading accounts, including on the FTX exchange.
This is not the first time that FTX has been embroiled in controversy. Back in November 2022, FTX faced a significant crisis when investors hurried to withdraw their assets, resulting in substantial losses.
FTX Collapse Impact on Galois Capital
Galios Capital suffered a substantial setback due to the FTX collapse, losing approximately half of its assets in connection with the event. In addition to the custody failures, the SEC also accused Galios of misleading investors regarding redemption processes.
Investors were led to believe that redemption requests had to be submitted at least 5 business days prior to the end of the month; however, some investors proceeded with redemption requests on shorter notice. Galois Capital has indicated that they will be releasing a statement concerning the charges in the near future.
Legal Perspective and Industry Reactions
Max Schatzow, a legal advisor specializing in compliance and enforcement matters related to investment advisors and fund managers, criticized the SEC’s actions as “vindictive” and considered the charges against Galois Capital excessive.
Another observer, identified as a ‘venture apologist’ on the X platform, remarked that Galois’ biggest mistake was selling their FTX claims at the worst possible time. Meanwhile, Luke Martin, a podcast host on Stacks, condemned the SEC’s regulatory stance, highlighting the agency’s failure to prevent major financial fraud while targeting firms like Galois Capital, which fell victim to such schemes.
In conclusion, the SEC’s enforcement actions against Galois Capital underscore the importance of compliance with regulatory standards in the crypto industry. These developments serve as a cautionary tale for market participants, emphasizing the necessity of adhering to stringent custody and disclosure requirements to protect investors and maintain regulatory compliance.
