Two SEC Lawyers Quit Following Debt Box Scandal

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  • Two Securities and Exchange Commission lawyers have resigned amidst a federal judge’s allegations of “gross abuse” of power in the case against Debt Box
  • Michael Welsh and Joseph Watkins, lead attorneys on the case, stepped down amid mounting criticism of the SEC’s handling
  • The SEC has acknowledged using “false and misleading representations” to obtain sanctions against Debt Box

Two Securities and Exchange Commission (SEC) lawyers have stepped down following a federal judge’s accusations of a “gross abuse” of power in its case against Debt Box. Michael Welsh and Joseph Watkins, lead attorneys on the case against the company and its product Debt Box, quit this month amid mounting criticism of the regulator’s handling of the case. The SEC has admitted to using what Judge Robert Shelby called “false and misleading representations” in order to impose sanctions on Debt Box, also known by its formal name Digital Licensing Inc., including an asset freeze.

SEC in the Dock

The SEC vs. Debt Box case began in July when the agency accused Debt Box’s executives of defrauding investors of at least $49 million. The case erupted in December when Judge Shelby expressed concern over the SEC’s handling of the case, highlighting the unusual application process where Debt Box 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. When this was uncovered, he castigated the SEC for using “false and misleading representations” to obtain an asset freeze order, among other sanctions.

Shelby outlined in a recent 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.

Walsh and Watkins Singled Out

Criticism was directed at Welsh and Watkins specifically for faulty arguments and evidence presented during proceedings. One notable instance involved Welsh’s assertion that Debt Box was moving assets overseas, a claim later debunked by the court.

In December, SEC enforcement chief Gurbir Grewal issued a public apology to the court, acknowledging the department’s missteps and instituting reforms, including appointing new attorneys to the case and implementing mandatory training for enforcement staff.

Activists who disapprove of the SEC’s approach to crypto enforcement have held this case up as a kind of cause celebre, showcasing it as evidence of the agency’s desperation to kill crypto and its use of illegal tactics to do so.