- A federal judge has sanctioned the SEC for misconduct in the DEBT Box lawsuit
- Judge Shelby criticized the agency’s distortion of facts to obtain a restraining order and imposed penalties
- This development intensifies scrutiny of the SEC’s approach under Chair Gary Gensler
A federal judge yesterday sanctioned the Securities and Exchange Commission (SEC) in relation to its lawsuit against Utah-based crypto company DEBT Box, accusing it of a “gross abuse of power.” Debt Box had accused the SEC of distorting crucial facts to obtain a temporary restraining order, which resulted in its assets being frozen without being notified. US District Judge Robert Shelby’s order compelled the SEC to explain its actions, leading to an admission of errors by the agency’s lawyers, but Shelby was not satisfied with the response and imposed penalties.
SEC Froze Debt Box’s Assets
In 2023 the SEC accused Digital Licensing Inc. of defrauding investors of nearly $50 million through Debt Box, with the agency obtaining a temporary restraining order, 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 asked to explain its actions, following Debt Box’s complaint.
Judge Shelby expressed concern over the SEC’s handling of the case, highlighting the unusual application process where Digital Licensing Inc. 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.
Judge Rejects SEC’s Call for Leniency
The SEC admitted that it had overstepped its boundaries in seeking the freeze, but Shelby rejected the SEC’s plea to avoid formal punishment, citing instances of “bad faith” conduct and condemning what he termed a “gross abuse of power.” In a detailed 80-page filing, Shelby imposed a sanction mandating the agency to cover Debt Box’s attorneys’ fees and costs linked to the restraining order.
Additionally, he dismissed the SEC’s motion to dismiss the lawsuit without prejudice, preventing the agency from bringing the lawsuit again in the future.
Judge Shelby’s decision marks a significant setback for the SEC and Chair Gary Gensler, whose aggressive stance on regulating the crypto industry has faced mounting criticism. With ongoing lawsuits involving major crypto companies like Coinbase, the ruling is likely to intensify scrutiny of the SEC’s enforcement methods.
