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The US Securities and Exchanges Commission (SEC) has launched an attack at yet another crypto related firm. And, won its case before even reaching the courts. Interestingly, this time around, the commission did not attack the firm over securities law breach but for “custody failures”.
The firm that faced the wrath of the most infamous law enforcement agency was Galois Capital Management. The firm was a crypto hedge fund that focuses in algorithmic market-making and over-the-counter (OTC) trading. And it made headlines for its close relations to FTX – the bankrupt crypto exchange, resulting in the firm losing access to over half of its assets.
Notably, at the helm of its operations, the company was managing nearly $200 million in assets, making it one of the crypto-focused quant funds. The closure saw the firm return clients only 90% of the non-FTX trapped funds, whereas the rest 10% was held back temporarily.
SEC charges for making bad decisions?
In its press release, the commission stated that Galois Capital was required to maintain its investors’ funds with a qualified custodian, as per the Investment Advisers Act’s Custody Rule. However, the firm did the opposite since the start of July 2022 by keeping its assets in “line trading accounts on crypto asset trading platforms, including FTX Trading Ltd.” This was around five months before FTX went belly up, resulting in the firm losing half of its investors’ assets.
The securities commission further said,
“The SEC’s order also found that Galois Capital misled certain investors by representing to them that redemptions required at least five business days’ notice before month end while allowing other investors to redeem with fewer days’ notice.”
The story is still developing.
