Judge Says SEC Abused Its Power, Made False and Misleading Representations in Case Against Crypto Firm

A federal judge in Utah has sanctioned the U.S. Securities and Exchange Commission (SEC) after the regulator copped to making an inaccurate statement in a crypto fraud case.

In an order filed on Monday, US District Court Judge Robert Shelby accused the SEC of “bad faith conduct in obtaining, maintaining, and defending” a temporary restraining order (TRO) against Digital Licensing Inc., a Utah-based company that was doing business under the name “DEBT Box.”

Last July, the SEC obtained a temporary asset freeze, restraining order, and other emergency relief against DEBT Box after alleging the firm and its founders operated a fraudulent scheme that involved selling fake “node licenses” to investors that the company said would generate crypto assets via mining.

The company allegedly raised around $50 million and unspecified amounts of Bitcoin (BTC) and Ethereum (ETH).

The SEC obtained the TRO and asset freeze in part by arguing that DEBT Box and its founders were funneling investor funds into luxury purchases and accounts overseas.

The defendants, however, filed a motion to dissolve the temporary restraining order granted by the court, claiming the SEC misrepresented facts in its allegations.

The restraining order was dissolved at a hearing in October, and in November, the case’s judge requested an explanation from the SEC about the alleged misrepresentations.

In a response filed in December, the SEC acknowledged that one of its lawyers “made a representation” that was inaccurate in the initial July restraining order hearing.

Michael Welsh, the SEC’s lead trial counsel, claimed during the hearing that the defendants had closed around 33 bank accounts in the 48 hours leading up to the court date.

The regulator admitted that Welsh’s number was derived from a miscommunication. In reality, the SEC explains, only 24 bank accounts were closed, and none were shuttered the month of the hearing.

The SEC did note, however, that the balances of several bank accounts owned by certain defendants were substantially decreased in July, but not closed. The regulator also acknowledged multiple instances where it erroneously presented interpretations and inferences as facts.

In his recent order, Judge Shelby called the SEC’s conduct a “gross abuse of power” that “substantially undermined the integrity of these proceedings and the judicial process.”

“In these circumstances, the court exercises its inherent authority to sanction the Commission’s bad faith conduct. Accordingly, the court imposes a sanction of attorneys’ fees and costs for all expenses arising from the TRO and appointment of the Receiver — to include payment of all the Receiver’s costs and fees.”

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