SEC Charges Crypto Advisor to Store Money in FTX

The U.S. Securities and Exchange Commission has brought another set of charges against Galois Capital, a cryptocurrency-focused advisory firm that held client assets in FTX.

For his actions, Galois agreed to pay a civil penalty of $225,000, which will be distributed to aggrieved investors in the fund.

Charged to lose money on FTX

According to the SEC’s Tuesday press release, the agency found that Galois failed to ensure that the private fund’s cryptocurrencies he was advising were held with a qualified custodian, instead holding them with unlicensed crypto trading platforms. qualified, such as FTX.

“Approximately half of the fund’s assets under management from early to mid-November 2022 were lost in connection with the collapse of FTX,” the SEC stated.

In dollar terms, the FTX crash was the largest corporate crypto failure in history, costing customers $8 billion and investors $1.7 billion. During the trial of its CEO Sam Bankman Fried a year later, the jury determined that he and other executives had committed massive fraud, secretly trading and losing client funds with FTX’s sister trading desk, Alameda Research.

The collapse of the exchange led to massive contagion and bankruptcies of other companies that relied on FTX, such as BlockFi, Genesis and Gemini Earn. Although Gemini successfully recovered virtually all of its users’ assets, FTX’s creditors are not expected to fully recover their assets in crypto-denominated terms.

Aside from relying on FTX, the SEC said Galois misled some investors by claiming withdrawals required five business days’ notice before the end of the month, while allowing other investors to redeem with shorter notice.

Galois Capital exposed investors to risks that funding assets, including crypto assets, could be lost, misused or misappropriated,” said Corey Schuster, co-head of the Asset Management Unit of the SEC. “We will continue to hold to account advisers who breach their basic investor protection obligations.”

Without admitting or denying the allegations, Galois agreed to pay the civil penalty and accepted an order barring him from further violations related to the Investment Advisers Act.

Answer from Galois Capital

In a post on Twitter on Tuesday, Galois Capital said it was happy to put its matters with the SEC behind it, although the firm claimed it had used Fireblocks as a crypto custodian. Fireblocks is one of the biggest infrastructure providers in crypto, and even welcomed former SEC Chairman Jay Clayton to its advisory board in 2021.

“While Fireblocks was not a qualified custodian, we felt they were the best solution for our needs and, in our opinion, the safest way to secure crypto for our investors at the time,” Galois said. .

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