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The U.S. Securities and Exchange Commission (SEC) has accused Florida-based Galois Capital of serious compliance failures and misrepresentation of information to investors.
The charges relate to the company's failure to adhere to required custodial practices and misleading information about refund policies.
According to the SEC orderGalois Capital, formerly a registered investment adviser to a private fund that invested primarily in cryptoassets, violated the Custody Rule of the Investment Advisers Act. This rule requires that client assets, including those offered and sold as securities, be held with a qualified custodian.
However, since July 2022, Galois Capital has not complied with these regulations and has held crypto assets in trading accounts on platforms such as FTX Trading, which the SEC does not consider to be qualified custodians.
This failure in custodial practices led to substantial losses: approximately half of the fund's assets under management were lost during the FTX collapse in November 2022.
Deceiving investors
In addition to the custodial failures, the SEC found that Galois Capital misled investors regarding redemption procedures.
According to the SEC filing, the company informed some investors that redemptions required at least five business days' notice at the end of the month, while others were permitted to make redemptions with shorter notice periods.
This inconsistency in refund policies resulted in investors being misled about the terms and conditions applicable to their investments.
By failing to comply with the provisions of the Custody Rule, Galois Capital exposed investors to significant risks, including the potential loss, misuse, or misappropriation of their assets. The SEC remains committed to holding accountable advisors who violate fundamental investor protection obligations.
Corey Schuster, Co-Director of the SEC's Division of Enforcement's Asset Management Unit.
To resolve the charges, Galois Capital has agreed to a civil penalty of $225,000. This penalty will be distributed to compensate the fund's injured investors.
Without admitting or denying the SEC's findings, the firm has agreed to cease further violations of the Advisers Act. In addition, Galois Capital has been formally censured as part of the order.
