US Securities and Exchange Commission Charges Hedge Fund Galois Capital Management LLC
SEC Settlement with Galois Capital Management LLC
The US Securities and Exchange Commission (SEC) has charged and settled with hedge fund Galois Capital Management LLC over a private fund managed by the firm that primarily invested in crypto, according to a statement published on September 3.
SEC Charges
The SEC charges are related to Galois Capital allegedly failing to comply with client asset safeguarding requirements, particularly crypto that the regulator labeled were offered as securities.
Settlement
Galois Capital agreed to pay a $225,000 civil penalty to settle the charges, which will be distributed to harmed investors.
Corey Schuster, Co-Chief of the SEC Enforcement Division’s Asset Management Unit, stated:
“By failing to comply with Custody Rule provisions, Galois Capital exposed investors to risks that fund assets, including crypto assets, could be lost, misused, or misappropriated.”
Schuster added that the regulator will continue to hold advisers accountable for violating their “core investor protection obligations.”
SEC Findings
The SEC found that from July 2022, Galois Capital violated the Investment Advisers Act’s Custody Rule by not securing its assets with a qualified custodian.
The firm held the digital assets in online trading accounts on platforms like FTX, which were not qualified custodians. Approximately half of the fund’s assets under management were lost when FTX collapsed in November 2022.
Misrepresentations and Cease of Advisers Act Violations
The SEC’s order also revealed that Galois Capital misrepresented redemption notice periods, claiming a five-business-day notice requirement while allowing some investors to redeem with shorter notice.
Galois Capital consented to cease further Advisers Act violations, accept the censure, and pay the imposed civil penalty without admitting or denying the findings.
Galois Capital and the FTX Collapse
Galois Capital co-founder Kevin Zho revealed on November 12, 2022, that roughly $40 million in funds were locked up in FTX after the exchange froze customers’ withdrawals.
The hedge fund gained notoriety in 2022 for predicting the collapse of the Terra ecosystem.
Four months after sharing how much has been stuck on FTX, Galois Capital shut down its operations and sold its claims on FTX for roughly 16 cents on the dollar.
Following the end of its operations, Galois Capital revealed a payment plan consisting of paying clients up to 90% of the funds not retained on FTX, while the remaining 10% would be withheld until the hedge fund’s auditing process is finalized.
Conclusion
The SEC’s action against Galois Capital Management LLC serves as a reminder of the importance of compliance with client asset safeguarding requirements and the need for hedge funds to prioritize investor protection. The settlement demonstrates the SEC’s commitment to holding advisers accountable for violating their core investor protection obligations.
FAQs
Q: What was the SEC’s main charge against Galois Capital Management LLC?
A: The SEC charged Galois Capital Management LLC with failing to comply with client asset safeguarding requirements, particularly crypto that the regulator labeled were offered as securities.
Q: What was the settlement amount agreed upon by Galois Capital Management LLC?
A: Galois Capital Management LLC agreed to pay a $225,000 civil penalty to settle the charges, which will be distributed to harmed investors.
Q: What was the result of Galois Capital’s operations after the FTX collapse?
A: Galois Capital shut down its operations and sold its claims on FTX for roughly 16 cents on the dollar. The hedge fund then revealed a payment plan to pay clients up to 90% of the funds not retained on FTX, while withholding the remaining 10% until the auditing process is finalized.
Q: What did the SEC’s order reveal about Galois Capital’s actions?
A: The SEC’s order revealed that Galois Capital misrepresented redemption notice periods and failed to secure its assets with a qualified custodian, leading to the loss of approximately half of the fund’s assets under management when FTX collapsed in November 2022.
