SEC accuses crypto advisor of mishandling funds at FTX

The U.S. Securities and Exchange Commission (SEC) has charged Galois Capital Management, a fund adviser, for failing to adhere to regulations concerning the proper custody of client assets, including maintaining investor funds with the now-defunct cryptocurrency exchange, FTX (CRYPTO:FTT).

This announcement was made on September 3.

The SEC's charges against Galois Capital Management allege violations of the agency's custody rule.

This rule mandates that investment advisers who hold client funds must do so with a qualified custodian, such as a registered broker-dealer or a bank.

According to the SEC, Galois failed to comply by holding crypto assets in online trading accounts on various exchanges, including FTX Trading Ltd.

When FTX collapsed in November 2022, Galois lost about half of its assets.

Corey Schuster, co-chief of the SEC enforcement division’s asset management unit, emphasized the importance of compliance with the custody rule.

He stated that failing to adhere to these provisions “exposed investors to risks that fund assets, including crypto assets, could be lost, misused, or misappropriated.”

Schuster added, "We will continue to hold accountable advisers who violate their core investor protection obligations."

The SEC also claims that Galois Capital misled some of its investors about the notice period required for redemptions.

According to the agency, the fund adviser told certain investors that they needed at least five business days’ notice before the end of the month to redeem their funds, while allowing others to redeem with shorter notice.

Following these findings, Galois Capital agreed to pay a civil penalty of $225,000.

This penalty will be distributed to the fund’s investors who were affected by the firm's actions.

FTX, which was never a qualified digital assets custodian, collapsed in November 2022 after experiencing a severe liquidity crisis and facing allegations of fraud and mismanagement.

This resulted in billions of dollars in customer funds becoming inaccessible, leading to FTX's bankruptcy filing.

At the time of writing, the FTX Token (FTT) price was $1.32.