As a researcher, I’m sharing an update on a recent development: The U.S. Securities and Exchange Commission (SEC) has reached a settlement with the troubled crypto hedge fund, Galois Capital. According to the SEC, Galois failed to comply with essential regulations designed to protect client assets, including those classified as “securities” by the agency itself.
FTX Costs Galois Capital Half Of Managed Assets
As reported by the SEC on Tuesday, it appears that Galois Capital made errors starting from July 2022. The alleged mistake was failing to secure certain cryptocurrencies stored in their private fund with a qualified custodian, which is against the regulations set forth in the Investment Advisers Act’s Custody Rule.
Rather than holding these assets themselves, the agency argues that the crypto firm deposited them in digital trading accounts on platforms such as FTX Trading. However, these platforms were not classified as “qualified custodians.”
As a result of this decision, the impact was substantial. After the downfall of FTX in November 2022, it’s estimated that about half of the assets managed by Galois were unfortunately depleted.
Settlement Reached
On Tuesday, the SEC claimed that Galois had deceived their investors by failing to disclose the necessary notice period for redemptions.
Certain investors were informed that they needed to give a minimum of five business days’ advance notice before the end of each month. However, some others were granted the ability to withdraw their investments with shorter notice. The Securities and Exchange Commission (SEC) pointed out that this discrepancy “established an unfair advantage among fund participants.” Corey Schuster, who serves as co-chief in the SEC Enforcement Division’s Asset Management Unit, stated:
If Galois Capital did not adhere to the guidelines set forth by the Custody Rule, it potentially put investors at risk of losing, misusing, or mismanaging their funds, which encompassed both traditional and cryptocurrency assets.
In the terms of the agreement, Galois Capital is set to pay a fine of $225,000, which will be disbursed among the investors who incurred losses as a result of the company’s conduct.
The firm has agreed to a ruling that demands them to stop any future breaches of the Advisers Act, without admitting or refuting the SEC’s conclusions.
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2024-09-03 20:30