SEC Lawyers Resign After Judge Blasts Agency for Abuse of Power in Crypto Fraud Trial

A federal judge has taken the unusual step of sanctioning the Securities and Exchange Commission (SEC) for “gross abuse of power” in a crypto fraud case, leading to the resignation of two SEC lawyers. The case involves the SEC’s lawsuit against the Utah-based crypto company DEBT Box, which was accused of defrauding investors out of nearly $50 million by selling unregistered securities.

The controversy began when the SEC obtained an ex parte temporary restraining order to freeze assets on the crypto platform without notifying DEBT Box. The SEC claimed that the company was aware of the investigation and was taking steps to flee the country. However, lawyers for DEBT Box later revealed that the SEC had misrepresented information in its request for the restraining order.

U.S. District Judge Robert Shelby ordered the SEC to explain its actions and later imposed sanctions on the agency, requiring it to pay DEBT Box’s attorneys’ fees and costs related to the restraining order. The judge also denied the SEC’s motion to dismiss the lawsuit without prejudice, which would have allowed the agency to bring the lawsuit again at a later date.

Judge Shelby’s ruling was a strong rebuke of the SEC’s actions, stating that the agency’s conduct “substantially undermined the integrity of these proceedings and the judicial process.” The judge also found that the SEC had engaged in “bad faith” conduct and had committed a “gross abuse of power.”

The SEC’s lawyers, Michael Welsh and Joseph Watkins, resigned earlier this month after being warned that they would be terminated if they stayed. The resignations are a rare occurrence, especially in a high-profile case involving a federal agency.

The controversy has sparked criticism of the SEC’s approach to regulating the crypto industry, with some arguing that the agency’s “regulation by enforcement” strategy has increased regulatory uncertainty and stifled innovation. The case has also highlighted concerns about the SEC’s use of ex parte temporary restraining orders, which can be obtained without notice to the defendant.

In the wake of the controversy, the SEC has moved to dismiss the case against DEBT Box, but the judge has yet to respond. The outcome of the case will be closely watched by the crypto industry, which has been critical of the SEC’s approach to regulation.