SEC charges Galois Capital with custody violations related to FTX

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The US Securities and Exchange Commission (SEC) has charged Galois Capital Management, a former registered investment adviser, with violating the Investment Advisers Act. The SEC found that the firm held certain crypto assets in online trading accounts on FTX Trading, which was not a qualified custodian.

Galois Capital’s exposure to FTX ultimately resulted in the loss of about half of the fund’s assets under management when FTX collapsed in late 2022, the SEC said in a Tuesday press release.

The SEC also found that Galois Capital misled investors about the redemption notice period by allowing some investors to redeem with shorter notice than others.

As part of the settlement, Galois Capital will pay a $225,000 fine, which will benefit the injured investors. The firm was also formally censured and given a cease and desist order barring future violations of the Investment Advisers Act.

Corey Schuster, co-head of the SEC’s Asset Management Unit, emphasized the importance of complying with investor protection laws, stating:

“By failing to comply with the custody rule, Galois Capital exposed investors to risks that funding assets, including crypto assets, could be lost, misused or misappropriated.”

Galois Capital has been a prominent player in the crypto hedge fund sector, known for its trading strategies and market knowledge. It was co-founded by Kevin Zhou, who became famous for making contrarian bets on the market, including an early warning about the collapse of Terra.

The collapse of FTX led to major challenges for Galois Capital. The company reported losses of about $40 million and had to cease operations and return investor capital.

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