The U.S. Securities and Exchange Commission recently announced charges against Galois Capital, a crypto-focused advisory firm that held client assets at FTX. The SEC found that Galois failed to ensure that the crypto held by the private fund it advised was with a qualified custodian, instead opting for unqualified platforms like FTX. This decision led to approximately half of the fund’s assets under management being lost due to the collapse of FTX, resulting in significant financial losses for investors.
FTX’s collapse was deemed the largest corporate crypto failure in history, costing customers $8 billion and investors $1.7 billion. During the trial of CEO Sam Bankman Fried, it was revealed that he and other executives were involved in massive fraud, including unauthorized trading with FTX’s sister trading desk, Alameda Research. The fallout from FTX’s collapse extended to other firms that trusted the exchange, such as BlockFi, Genesis, and Gemini Earn. While Gemini was able to recover most assets for its users, FTX creditors are unlikely to fully retrieve their assets in crypto terms.
Aside from improper custody practices, the SEC accused Galois of misleading investors by providing conflicting information regarding withdrawal procedures. Some investors were required to provide five days’ notice for withdrawals, while others were allowed to redeem their investments with shorter notice. This inconsistency exposed investors to the risk of losing, misusing, or misappropriating fund assets, including crypto holdings. Corey Schuster, Co-Chief of the SEC Enforcement Division’s Asset Management Unit, emphasized the agency’s commitment to holding advisors accountable for breaching investor protection obligations.
In response to the SEC’s charges, Galois agreed to pay a civil penalty of $225,000 and accepted an order to refrain from further violations of the Investment Advisers Act. Despite not admitting to the allegations, the firm opted to settle with the SEC to resolve the matter. Galois Capital took to Twitter to express relief in putting the SEC investigation behind it, asserting that it had used Fireblocks as its custodian for crypto assets. Fireblocks, a major infrastructure provider in the crypto industry, was chosen by Galois due to its perceived safety and suitability for securing investors’ assets.
The SEC charges against Galois Capital highlight the importance of proper custody practices and transparent communication with investors in the financial industry. The consequences of failing to meet regulatory standards can be severe, leading to significant financial losses and reputational damage. By holding advisors accountable for their actions and promoting compliance with investor protection regulations, regulatory bodies like the SEC aim to safeguard investors and uphold the integrity of the financial markets. It is crucial for firms to prioritize regulatory compliance and ethical conduct to maintain trust and credibility within the industry.
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