SEC Charges Galois Capital for FTX-Linked Improper Crypto Custody
SEC Takes Action Against Galois Capital
The U.S. Securities and Exchange Commission (SEC) has charged Galois Capital Management with serious infractions related to the custody of client assets. The announcement on September 3 details allegations that Galois Capital mishandled investor funds by keeping them on the now-defunct FTX cryptocurrency exchange. This breach of the SEC's custody rule, which mandates that investment advisers must hold client funds with qualified custodians like registered broker-dealers or banks, has led to significant repercussions for the firm.
Galois Capital, once a notable entity in the crypto hedge fund industry, was co-founded by Kevin Zhou, recognized for his contrarian market predictions, including an early alert about the Terra collapse. According to the SEC, Galois Capital held digital assets in trading accounts across several exchanges, including FTX Trading Ltd. When FTX collapsed in November 2022, the fund suffered a substantial hit, losing approximately half of its assets. This led to the firm winding down its operations and returning what was left of the investor capital.
The SEC's charge points out that Galois Capital's failure to comply with custody rules exposed investors to substantial risks, such as the potential loss, misuse, or misappropriation of their assets. Corey Schuster, co-chief of the SEC's asset management unit, emphasized that the commission will continue to enforce accountability for advisers who breach their core obligations to protect investors.
Since 2021, the U.S. has seen a rise in qualified digital asset custodians, including Anchorage Digital Bank, Fireblocks Trust Company, Coinbase Custody Trust, and Fidelity Digital Asset Services. However, FTX was never included among these qualified entities. FTX's collapse, attributed to a severe liquidity crisis and allegations of fraud, resulted in billions in customer funds becoming inaccessible and the company's eventual bankruptcy.
The SEC also alleges that Galois Capital misled investors regarding redemption notices. The firm reportedly told some investors that redemptions required at least five business days' notice before month-end, while others were allowed to redeem with shorter notice periods. As part of the settlement, Galois Capital has agreed to pay a $225,000 civil penalty, which will be distributed to the fund's affected investors. This action underscores the SEC's commitment to holding advisers accountable for failing to meet essential investor protection standards.
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