The U.S. Securities and Exchange Commission (SEC) has accused crypto-focused investment advisory firm Galois Capital of problems related to the way it holds client assets and subsequently reached a settlement.

According to the SEC's statement, the allegations were primarily related to a private fund investing in cryptocurrency. Corey Schuster, co-head of the Asset Management Unit of the SEC Enforcement Division, said, “Galois Capital caused the fund's assets, especially cryptocurrency assets, to be exposed to the risks of loss, misuse, or misappropriation by not complying with the Custody Rule provisions.” Schuster added, “We will continue to hold advisers accountable for violating investor protection obligations.”

FTX scandal engulfed

Miami-based Galois Capital did not ensure that certain crypto assets held by a private fund it advised have been held by a 'qualified custodian' from July 2022. The SEC stated that Galois held these assets on crypto platforms such as FTX Trading LTD., which are not qualified custodians.

Galois Capital was heavily affected by FTX's sudden collapse a few years ago. FTX filed for bankruptcy protection in November 2022 and top executives, including former CEO Sam Bankman-Fried, faced criminal charges. According to the SEC, approximately half of Galois' assets under management were lost within a few weeks in November 2022 following FTX's collapse. The firm closed in February 2023.

He did not accept the accusations

Galois did not accept or deny the findings of the SEC, but agreed to avoid future violations of the Investment Advisers Act and agreed to pay a fine of $225,000.

The SEC also stated that Galois misled its fund investors about the "notice period required to meet the demands." Galois Capital Alpha Fund LP required investors to provide written notice 30 days in advance in order to withdraw their funds, but some investors were allowed to withdraw with a shorter notice period.

SEC added that this situation is misleading due to the privileges provided by Galois to certain investors.