The U.S. Securities and Exchange Commission (SEC) has charged fund adviser Galois Capital Management for failing to custody client assets, including holding investor funds with the now-defunct cryptocurrency exchange FTX.
The SEC’s charges claim that Galois broke the custody rule by not keeping client funds with a qualified custodian, such as a registered broker-dealer or bank. Instead, Galois reportedly held crypto assets in online trading accounts across different crypto exchanges, including FTX. The fund lost nearly half of its assets in November 2022 after FTX collapsed.
“Failing to comply with custody rule provisions exposed investors to risks that fund assets, including crypto assets, could be lost, misused, or misappropriated,” said Corey Schuster, co-chief of the SEC enforcement division’s asset management unit. “We will continue to hold accountable advisers who violate their core investor protection obligations.”
Since 2021, the U.S. has seen an increase in qualified digital asset custodians, such as Anchorage Digital Bank, Fireblocks Trust Company, Coinbase Custody Trust, and Fidelity Digital Asset Services. FTX, which collapsed in November 2022 amid a liquidity crisis and fraud allegations, was not among these custodians.
The SEC also alleges that Galois misled fund investors about the notice period required for redemptions, stating that some investors were told a minimum of five business days was needed, while others were allowed to redeem with less notice.
Galois has agreed to pay a civil penalty of $225,000, which will be distributed to the fund’s affected investors.
Sam Bankman-Fried, former CEO of FTX, was found guilty in November 2023 of seven criminal counts, including wire fraud and conspiracy to commit wire fraud, resulting in a nearly 25-year prison sentence. The U.S. Securities and Exchange Commission has also charged him with fraud.
FTX and associated trading firm Alameda Research also agreed to pay $12.7 billion to creditors, following the approval of a consent order by New York judge P. Kevin Castel on Wednesday.
The settlement agreement concludes a 20-month-long lawsuit brought by the Commodity Futures Trading Commission (CFTC). FTX, former CEO Sam Bankman-Fried, and Alameda were accused in December 2022 of fraud resulting in customer losses of $8 billion.
The deal requires FTX and Alameda to pay $8.7 billion in restitution to customers affected by their violations of the Commodity Exchange Act. Additionally, $4 billion in disgorgement is mandated for gains obtained through these violations.
These amounts will be managed through FTX and Alameda’s ongoing bankruptcy proceedings, with funds or assets used to repay creditors, overseen by the interim CEO of FTX Trading, John Ray, or a plan administrator.
