Galois Capital, a company in Florida, has accused the U.S. Securities and Exchange Commission (SEC) of grave compliance violations and investor deception.
The charges center on the company’s dissemination of false information regarding redemption policies and disregard for mandatory custody procedures.
According to the SEC’s decision, Galois Capital violated the Investment Advisers Act’s Custody Rule. Galois Capital was formerly a registered investment adviser for a private fund largely invested in cryptocurrency assets.
This rule requires that all client assets be kept with a competent custodian, including those offered and sold as securities.
But starting in July 2022, Galois Capital broke the law by storing cryptocurrency in trading accounts on sites like FTX Trading, which the SEC does not consider qualified custodians.
When FTX collapsed in November 2022, about half of the fund’s assets under administration were lost due to this breach in custodial procedures, resulting in significant losses.
Misleading Investors
The SEC discovered that Galois Capital had misled investors about redemption procedures and custody violations.
The firm notified certain investors that redemptions needed to be made at least five business days before the end of the month, but shorter notice periods were acceptable for other investors, according to the SEC filing.
Due to the inconsistent redemption rules, investors needed to be more informed about the terms and conditions of their investments. Corey Schuster, Co-Chief of the SEC Enforcement Division’s Asset Management Unit:
By failing to comply with Custody Rule provisions, Galois Capital exposed investors to significant risks, including the potential loss, misuse, or misappropriation of their assets. The SEC remains committed to holding advisers accountable who violate fundamental investor protection obligations.”
Galois Capital has consented to a settlement with a $225,000 civil penalty to resolve the charges. Investors whom the fund injured will get compensation in the form of this penalty.
The corporation has committed to refraining from further violations of the Advisers Act without acknowledging or disputing the SEC’s conclusions. As part of the decision, Galois Capital has also been formally censured.
