U.S. SEC Charges Crypto Hedge Fund Galois Capital Over Custody Failures

The United States Securities and Exchange Commission (SEC) charged the crypto hedge fund Galois Capital for failing to comply with custodian requirements involving customers’ funds. The hedge fund’s financial troubles stem from exposure to the collapsed crypto derivatives exchange FTX. As part of the latest settlement with the SEC, Galois Capital will pay $225,000 to settle affected users whose funds were lost in the financial crisis.

Highlighting the extent of the hedge fund’s offenses, the SEC Enforcement Division’s Asset Management Unit Co-Chief, Corey Schuster, said:

“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. We will continue to hold accountable advisers who violate their core investor protection obligations.”

Galois Capital’s Financial Woes

Galois Capital operates as an investment advisory firm, requiring users to invest their funds into crypto assets the firm recommends. The SEC’s investigation disclosed that the hedge fund failed to choose a reliable crypto custodian. Starting in July 2022, Galois Capital selected FTX as one of its digital asset custodians, a move the financial watchdog dismissed as wrong.

After the FTX crash in early November 2022, Galois Capital took a big hit, losing around half its assets under management (AUM). Reports published at the time of the incident confirmed that the fund had up to $45 million stuck in FTX. This financial challenge forced the troubled crypto hedge fund to halt operations in February 2023. Galois Capital promised clients 90% of the remaining funds despite the sudden crash.

The regulatory agency discovered that Galois Capital misled some investors by claiming that fund redemption was possible with “at least five business days’ notice before month end.” On the other hand, certain investors were allowed to redeem their funds within an earlier timeframe.

While agreeing to the terms and penalties from the government, Galois Capital did not admit or deny the SEC’s claims.