SEC abused its authority in case against crypto platform, says US judge

By Austin Weinstein and Allyson Versprille

A federal judge in Utah took the extremely unusual step of sanctioning the Securities and Exchange Commission, saying that the regulator abused its authority in a case against crypto platform Digital Licensing Inc., known as DEBT Box.
 

The SEC’s conduct “constitutes a gross abuse of the power entrusted to it by Congress and substantially undermined the integrity of these proceedings and the judicial process,” Robert Shelby, a federal district court judge in Salt Lake City, said in an 80-page legal filing on Monday. He also ordered the agency to pay DEBT Box’s attorney’s fees and other costs related to the restraining order that the regulator had sought against the crypto platform.

An SEC spokesperson said the regulator is reviewing the decision. Richard Hong, an attorney for DEBT Box, declined to comment. 

The SEC sued DEBT Box in July 2023, accusing the crypto platform of defrauding investors of at least $49 million. The same month, Shelby froze the company’s assets and put the company into receivership at the SEC’s request. 

However, the freeze was later reversed after the court found that the SEC may have made “materially false and misleading representations” in the process. 

In one example cited by Shelby, when the SEC asked for its freeze against DEBT Box, Michael Welsh, an SEC attorney, said that DEBT Box was moving investor funds abroad. After DEBT Box disputed that statement, Welsh told the court that he did not have direct evidence of investor funds being moved overseas, and that he was making an “inference” based in part on a YouTube video by a DEBT Box official. 

According to Shelby, the regulator’s misconduct wasn’t limited to a single misstatement or imprecise comment. Each piece of evidence the SEC used to seek and later defend the emergency restrictions against DEBT Box “proved to be some combination of false, mischaracterized, and misleading,” he said in the Monday order. 

The SEC’s enforcement chief, Gurbir Grewal, apologized to Shelby for mistakes make in the DEBT Box case in December. Welsh also apologized for his conduct. Grewal said he would mandate new training for SEC enforcement staff on the standards needed when seeking emergency relief.

Last month, several Republican senators sent a letter to SEC Chair Gary Gensler, saying cases such as the one involving DEBT Box undermine the public’s trust in the regulator’s enforcement actions. 

Some in the crypto industry, which has been locked in a bitter fight with the SEC, took to social media to spotlight the judge’s rebuke on Monday.

However, Shelby emphasized that the Monday order shouldn’t be read as providing an opinion on the underlying merits of the SEC’s case, which the court hasn’t yet been able to evaluate. “This Order focuses exclusively on the Commission’s conduct.” The judge also denied the agency’s motion to dismiss the case. 

“Regulatory agencies require supervision by people who understand the gravity of the matters they are supervising,” said Paul Pelletier, a former federal prosecutor who now works as a consultant. “It sounds like the supervisors were asleep at the switch here.”