SEC accuses Galois Capital of misleading investors, custody failures

The
U.S.
Securities
and
Exchange
Commission
(SEC)
has
charged
Florida-based
Galois
Capital
with
serious
compliance
failures
and
investor
misrepresentation.

The
charges
relate
to
the
firm’s
failure
to
adhere
to
required
custody
practices
and
misleading
information
about
redemption
policies.

According
to
the
SEC’s

order,
Galois
Capital,
previously
a
registered
investment
adviser
for
a
private
fund
primarily
investing
in
crypto
assets,
breached
the
Investment
Advisers
Act’s
Custody
Rule.
This
rule
mandates
that
client
assets,
including
those
offered
and
sold
as
securities,
must
be
maintained
with
a
qualified
custodian.

However,
since
July
2022,
Galois
Capital
did
not
comply
with
these
regulations,
holding
crypto
assets
in
trading
accounts

on
platforms
like
FTX
Trading,
which
are
not
deemed
qualified
custodians
by
the
SEC.

This
lapse
in
custodial
practices
led
to
substantial
losses,
with
approximately
half
of
the
fund’s
assets

under
management
lost
during
the
collapse
of

FTX
in
November
2022.

Misleading
investors

In
addition
to
custody
failures,
the

SEC
found
that
Galois
Capital
misled
investors
regarding
redemption
procedures. 

According
to
the
SEC’s
filing,
the
firm
informed
some
investors
that
redemptions
required
at
least
five
business
days’
notice
before
the
end
of
the
month,
while
others
were
allowed
to
redeem
with
shorter
notice
periods.

This
inconsistency
in
redemption
policies
resulted
in
misleading
investors
about
the
terms
and
conditions
applicable
to
their
investments.

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.

Corey
Schuster,
Co-Chief
of
the
SEC
Enforcement
Division’s
Asset
Management
Unit.

To
resolve
the
charges,
Galois
Capital
has
agreed
to
a
settlement
with
a
civil
penalty
of
$225,000.
This
penalty
will
be
distributed
to
compensate
the
fund’s
harmed
investors.

Without
admitting
or
denying
the
SEC’s
findings,
the
company
has
agreed
to
cease
any
further
violations
of
the
Advisers
Act.
Additionally,
Galois
Capital
has
been
formally
censured
as
part
of
the
order.