SEC accuses Galois Capital of misleading investors, custody failures

The U.S. Securities and Exchange Commission (SEC) has accused Florida-based Galois Capital of serious non-compliance and misinforming investors.

The charges relate to the firm’s failure to comply with required custody practices and providing misleading information about its repurchase policies.

According to the SEC’s order, Galois Capital, a registered investment advisor for a private fund that previously invested in crypto assets, violated the Investment Advisers Act’s Custodial Rule, which requires client assets, including those offered and sold as securities, to be held at a qualified custodian.

However, Galois Capital has not complied with these regulations since July 2022, holding crypto assets in trading accounts on platforms such as FTX Trading, which are not considered qualified custodians by the SEC.

This glitch in custody practices led to significant 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 the custody failures, the SEC found that Galois Capital also misled investors about its redemption procedures.

According to the SEC filing, the company informed some investors that refunds must be made at least five business days before the end of the month, while allowing others to make refunds with shorter notice periods.

This inconsistency in refund policies has led to investors being misled regarding 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 abuse of their assets. The SEC is committed to holding advisors who violate their fundamental investor protection obligations accountable.

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

To resolve the charges, Galois Capital agreed to a $225,000 fine, which will be distributed to compensate the fund’s injured investors.

Without admitting or denying the SEC’s findings, the company agreed to stop further violations of the Advisers Act. Galois Capital was also formally reprimanded as part of the order.