Galois Capital to pay $225K to investors in SEC settlement

The Securities and Exchange Commission charged the defunct crypto hedge fund Galois Capital with failing to properly safeguard client assets.

As part of the settlement, Galois agreed to pay $225,000 as a civil penalty. The funds will be distributed to the fund’s “harmed investors.”

After an exhaustive and costly investigation of nearly two years, and without admitting or denying the findings detailed in the SEC’s order, we agreed to settle with the SEC and pay a $225,000 penalty which will go directly to our investors.

“The SEC’s order found that, beginning in July 2022, Galois Capital failed to ensure that certain crypto assets held by the private fund that it advised were maintained with a qualified custodian, a violation of the Investment Advisers Act’s Custody Rule,” the SEC said in a press release.

Galois held crypto on FTX and other non-qualified custodians, the SEC alleged. 

Read more from our opinion section: We need to talk about the dangers of custody on exchanges

“Approximately half of the fund’s assets under management from early to mid-November 2022 were lost in connection with the collapse of FTX. The SEC’s order also found that Galois Capital misled certain investors by representing to them that redemptions required at least five business days’ notice before month end while allowing other investors to redeem with fewer days’ notice,” the SEC continued.

The X account for Galois Capital said: “We used Fireblocks, a non-qualified custodian, as a best-in-class solution to secure our crypto assets. Although Fireblocks was not a qualified custodian, we believed they were the best solution for our needs and, in our opinion, the safest way to secure crypto for our investors at the time. We disclosed our use of Fireblocks in our Form ADV filing with the SEC.”

The settlement, however, does not mean that Galois agreed with or denied the SEC’s findings. As part of the deal, it agreed to a cease and desist from further violating the Advisers Act.  

“By failing to comply with Custody Rule provisions, Galois Capital exposed investors to risks that fund assets, including crypto assets, could be lost, misused or misappropriated,” said Corey Schuster, co-chief of the SEC Enforcement Division’s Asset Management Unit.

The hedge fund shut down in February of last year after the collapse of FTX. It said, at the time, that it lost $45 million that it kept on the exchange.  

Updated September 3, 2024 at 3:13 pm ET: Added statement and X post from Galois Capital.

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