The U.S. Securities and Exchange Commission has announced new charges against Galois Capital, a crypto-focused advisory firm that custodied client assets at FTX. As part of a settlement, Galois has agreed to pay a civil penalty of $225,000, with the funds being distributed to affected investors. The SEC found that Galois failed to ensure that the crypto held by the fund it was advising was properly secured with a qualified custodian, instead opting for unqualified crypto trading platforms like FTX. Consequently, a significant portion of the fund’s assets were lost during the collapse of FTX, resulting in substantial financial losses for investors.
The collapse of FTX was deemed the largest corporate crypto failure in history, leading to losses of $8 billion for customers and $1.7 billion for investors. Subsequent investigations revealed that FTX executives, including CEO Sam Bankman Fried, had engaged in fraudulent activities by trading and losing customer funds through FTX’s sister trading desk, Alameda Research. This chain of events triggered a ripple effect, causing the bankruptcy of other firms such as BlockFi, Genesis, and Gemini Earn, who had placed their trust in FTX. While some firms managed to recover assets for their users, FTX creditors are not expected to fully recover their assets in crypto terms.
Investor Misguidance Allegations
In addition to the custodian failures, the SEC accused Galois of misleading investors by providing false information regarding withdrawal procedures. While some investors were told that withdrawals required a five-day notice before the end of the month, others were allowed to redeem funds on shorter notice. This discrepancy exposed investors to risks, as it implied that fund assets, including crypto assets, could be susceptible to loss, misuse, or misappropriation. Corey Schuster, Co-Chief of the SEC’s Enforcement Division’s Asset Management Unit, emphasized the importance of holding advisers accountable for upholding investor protection standards.
Galois Capital neither admitted nor denied the allegations but agreed to pay the civil penalty and comply with an order preventing further violations of the Investment Advisers Act. Following the settlement, Galois expressed relief in putting the SEC matter behind them and clarified that they had utilized Fireblocks as their crypto custodian. Despite Fireblocks not being a qualified custodian, Galois defended their decision, citing it as the best option for securing crypto assets for investors at the time. Fireblocks, a prominent infrastructure provider in the crypto industry, had even welcomed former SEC chair Jay Clayton to its advisory board in 2021, further complicating the narrative surrounding custodian choices in the sector.
By critically examining the actions of Galois Capital and the repercussions of their misconduct, it is evident that regulatory oversight and compliance are crucial for safeguarding investor interests in the crypto space. The enforcement actions taken by the SEC serve as a stark reminder to advisory firms and investment managers about the importance of transparency, due diligence, and adherence to regulatory guidelines to prevent similar breaches in the future.
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