SEC Faces Criticism from Judge in Crypto Case, Possible Sanctions Loom

A judge in the United States has scolded the Securities and Exchange Commission (SEC) for its handling of a case involving a crypto firm, expressing worry that the agency may have given wrong information to freeze millions of dollars in the project's assets.

Ad

The case, filed in a federal court in Utah, is about a company called Digital Licensing Inc., also known as DEBT Box. In the summer, the SEC accused the project of cheating investors out of almost $50 million by selling something called "node licenses."

The SEC did something unusual by getting a temporary order to freeze assets through a process called ex parte. This means the crypto company didn't know about it and couldn't challenge it at the time. Usually, this happens when a government agency thinks telling the defendant will make them get rid of evidence or move assets away.

Advertisement

In a recent order, U.S. District Judge Robert Shelby explained that he agreed to the SEC's request because the SEC's lawyer said the crypto company was closing bank accounts to move the firm overseas. But it turned out that this wasn't true. The judge said some of the SEC's arguments were wrong and didn't match the facts. He found that the company hadn't closed any bank accounts in the 48-hour window, and much of its operations had already moved months before. Also, it was the banks, not the company, that closed some accounts, and a $720,000 transfer the SEC used to justify the seizure actually happened within the country.

The judge said he was troubled because the SEC lawyer's statements were not corrected by others present, and the SEC accused the crypto company of blocking investigators from seeing its social media, but there's no proof the company knew about any investigation.

Judge Shelby thinks the SEC might have given wrong information to the court, which could break the rules.

The document from the judge is a "show cause order," which asks the SEC to explain why the court shouldn't punish it for what happened. Orders like this are common for private parties but very rare for government agencies.

The SEC has two weeks to reply to the judge's order. This comes at a time when the SEC is already involved in lawsuits against big crypto companies like Coinbase and Ripple. The industry has often complained that the SEC, under Chairman Gary Gensler, is treating it unfairly.

An August report from blockchain analytics firm TRM Labs supports the SEC's main claims against DEBT Box, but a lawyer for the defendants didn't comment.

When asked for a comment, an SEC spokesperson said, "We got the order to show cause and will respond to the court as directed.

Also Read: Delaware Judge Proposes Speedy Trial Resolution for Berkshire Hathaway and Haslam Family Dispute