SEC Shake-Up: Lawyers Resign After Judge Slams Agency for ‘Gross Abuse’ in Crypto Case

By Jody McDonald April 23, 2024 In Cryptocurrency Law, SEC

Securities and Exchange Commission (SEC) is us government oversight agency responsible for regulating the securities markets and protecting investors.The word is written — Source:AdobeStock

Two SEC attorneys have resigned after being accused of making potentially false and misleading representations to the court by the judge in the regulator’s case against DEBT Box.
The judge also accused the SEC itself of a gross abuse of its powers, prompting an apology from the regulator’s head of enforcement.
The SEC has been ordered to pay some of DEBT Box’s legal fees and the regulator has now filed a motion to have this case dismissed.

Well, well well. If it isn’t another questionable SEC case against a crypto company.

This time two Securities and Exchange Commission (SEC) attorneys have been forced to resign after their actions in the regulator’s case against Utah-based crypto project, DEBT Box. The attorneys were savaged by the sitting judge, who accused them both of making potentially false and misleading representations to the court.

The judge also sanctioned the SEC for what he described as its “gross abuse” of power in the case, prompting an apology from the regulator’s head of enforcement. The judge also ordered that the SEC pay some of DEBT Box’s legal fees and last week the crypto firm’s lawyers filed a motion requesting over US$1.5 million from the regulator.

Attorneys Quit To Avoid Being Forced Out

According to Bloomberg the two lead attorneys in the SEC’s case against DEBT Box, Michael Welsh and Joseph Watkins, decided to resign earlier this month after being told by higher-ups at the SEC they’d be fired if they didn’t voluntarily step down.

The two attorneys had both been accused of making false statements and lacking evidence against DEBT Box by the judge hearing the case, Robert Shelby.

Two of the SEC lawyers involved in the Debtbox case have been pressured to resign.

But the Court found that the misconduct in Debtbox was not isolated to a couple individuals, but rather there was "pervasive misconduct [demonstrating] a pattern of organizational bad faith and… https://t.co/luKQKtqwfT
— MetaLawMan (@MetaLawMan) April 22, 2024

According to securities lawyer James Murphy (a.k.a MetaLawMan on X), the judge also found that the SEC’s misconduct in this case wasn’t limited to just these two lawyers, saying there was “pervasive misconduct [demonstrating] a pattern of organizational bad faith and broadly implicates the Commission itself.”

What Exactly Happened In This Case?

In July 2023, the SEC accused DEBT Box of defrauding investors to the tune of US$49 million. In order to ostensibly protect investors, the regulator requested that Judge Shelby freeze DEBT Box’s assets and put the company into receivership, which he did.

However, Judge Shelby soon reversed his ruling saying that the SEC may have made “materially false and misleading representations” and savaging what he said was the regulator’s “gross abuse of power entrusted to it by the congress”.

In one particularly egregious example of the misleading representations made by the SEC, the regulator claimed that DEBT Box was closing its bank accounts and transferring its assets off-shore—but the judge found this simply didn’t happen. The SEC claims this false information was the result of miscommunication.

In December the SEC’s head of enforcement, Gurbir Grewal, apologised to the court, saying that new attorneys had been appointed to this case and that enforcement staff now have to undergo mandatory training. The SEC has since filed a motion to have this case dismissed: no decision on this motion has yet been made.