Crypto Firm Galois Capital Must Pay $225,000 Fine to SEC Over FTX Ties

Key Points:

• Crypto firm Galois Capital settled with the SEC for failing to comply with asset protection rules and misleading investors about redemption notice periods.
• The firm agreed to pay a $225,000 civil penalty, cease further violations of the Investment Advisers Act, and be censured.

The SEC has settled charges with crypto firm Galois Capital Management LLC, a registered investment adviser headquartered in Florida, which managed a private equity fund focused on crypto assets.

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SEC Settles Charges with Crypto Firm Galois Capital for Failure to Safeguard Client Assets

The charges filed by the SEC relate to crypto firm Galois Capital’s failure to take reasonable steps to protect client assets while trading in securities.

Per the SEC’s order, Galois Capital failed to ensure that crypto assets were held by a qualified custodian in accordance with the Investment Advisers Act from July 2022 forward. Instead, they held these assets in online trading accounts with entities such as FTX Trading, which does not qualify as a qualified custodian. This failure in its custody practices caused it to lose nearly half of its assets in the fund when FTX went down in November 2022.

Crypto firm Galois Capital also deceived investors about the notice period required when attempting to redeem cash from the fund. To cover that up, it informed certain investors that a minimum of five days’ business notice was necessary while allowing others to redeem on shorter notice.

FTX Collapse: Galois Capital Must Return Clients Up to 90% of Funds

In order to settle the charges brought against them by the SEC, Galois Capital agreed to pay a $225,000 civil penalty that will be given to the affected investors. It also agreed to an order to cease and desist from further violations of the Advisers Act and it will be actually censured.

Co-founder of Galois Capital Kevin Zho revealed earlier that about $40 million of the fund was stuck on FTX after the exchange frozen withdrawals.

The firm, which briefly became famous for correctly predicting the implosion of the Terra ecosystem, shut down in early 2023 and sold its claims against FTX at a major loss. It has pledged to refund clients up to 90% of their money that was not held on FTX, holding the remaining 10% until audits are complete.