Judge Scolds SEC Over “False and Misleading Representations”

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  • A federal judge in Utah has criticized the SEC for potentially making “false and misleading representations” after freezing the assets of crypto firm Digital Licensing Inc.
  • The SEC accused the company of defrauding investors and obtained a restraining order without notifying it, but the court has found the claims false
  • The SEC may face sanctions for its actions against Digital Licensing Inc., highlighting challenges in its regulatory approach.

A federal judge in Utah has criticized the Securities and Exchange Commission (SEC) for potentially making “materially false and misleading representations” to freeze assets of the cryptocurrency firm Digital Licensing Inc. The SEC accused Digital Licensing Inc. of defrauding investors of nearly $50 million through its company DEBT Box, with the agency obtaining a temporary restraining order and asset seizure without notifying the company, alleging that it was moving operations to Abu Dhabi. However, the court found the SEC’s claims to be false, leaving the SEC facing embarrassment and, worse, sanctions.

SEC Attorneys Misrepresented Account Closure Evidence

In his order, US District Judge Robert Shelby expressed concern over the SEC’s handling of the case, highlighting the unusual application process where the crypto firm was not informed or able to challenge the proceedings. The judge granted the SEC’s request based on the agency’s assertion that DEBT Box was actively closing bank accounts to move operations beyond US regulators’ reach, a claim later proven untrue.

Shelby outlined in his order that the SEC attorney’s misrepresentation of account closures troubled him, especially as it wasn’t corrected by others present during the proceedings. Additionally, the SEC accused DEBT Box of obstructing investigators from viewing its social media sites, yet the agency failed to provide evidence that the company was aware of any investigation.

SEC May Face Sanctions

The judge concluded that the SEC may have deceived the court, potentially violating federal court rules; the “show cause order” issued by Shelby demands the SEC provide reasons why it should not face sanctions for its behavior. Such orders are uncommon and typically directed at private parties.

This development adds to the SEC’s challenges as it faces further scrutiny and criticism for its approach toward the crypto industry, with ongoing lawsuits against prominent companies like Coinbase and Ripple. The agency has two weeks to respond to Shelby’s order, and industry critics may leverage this case to emphasize long-standing complaints about the SEC’s adversarial stance under Chairman Gary Gensler.