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- Galois Capital has settled with the SEC over failures in safeguarding client assets and misleading investors
- The firm has agreed to pay a $225,000 penalty, which will be distributed to impacted investors
- Galois was accused of storing client funds on exchanges and offering preferential rates
Galois Capital, a crypto custody firm, has settled with the US Securities and Exchange Commission (SEC) over “failures” in how it custodied user funds. Galois was charged with failing to properly safeguard client assets and misleading investors about redemption terms during the market turbulence of 2022. The firm will pay a $225,000 penalty, which the SEC intends to distribute to harmed investors as part of its investor restitution efforts, but has not admitted or denied the charges.
Galois Left Customer Funds on Exchanges
The SEC took enforcement action against the crypto advisory firm for severe violations of custody rules and investor protection protocols, alleging that it did not comply with crucial regulatory guidelines requiring client assets to be stored with qualified custodians.
Instead, Galois stored a significant portion of its clients’ crypto assets with unqualified custodial platforms, including the now-bankrupt FTX. When FTX collapsed in November 2022, it led to substantial losses for Galois’ clients.
“The SEC’s custody rule is designed to ensure that firms handle client funds responsibly, and the crypto space is not exempt from these critical investor protections,” said Gurbir S. Grewal, Director of the SEC’s Division of Enforcement. “Galois failed to fulfill its obligations, and this failure caused significant harm to investors.”
Preferential Rates Offered
In addition to custody violations, the SEC alleged that Galois Capital misrepresented its redemption policies during the crypto market’s downturn in 2022. The firm purported to offer equal redemption rights to all investors, but in reality, certain clients received preferential treatment, receiving earlier and better redemption opportunities, while others were left in a vulnerable position, further intensifying their losses.
“By misrepresenting its redemption policies and failing to use qualified custodians, Galois Capital left its clients exposed to substantial risks, contributing to the financial losses they ultimately suffered,” Grewal added.
Without admitting or denying the charges, Galois Capital has agreed to a $225,000 civil penalty, which the SEC intends to distribute to those who lost out financially through Galois’ actions. Galois Capital’s flagship custody fund was forced to shutter following the collapse of FTX.
