Another Shock to the SEC: Judge Gives a Strong Reprimand to the SEC in Cryptocurrency Case

A federal judge ruled against Digital Licensing Inc., also known as DEBT Box. a named cryptocurrency issued a harsh reprimand to the Securities and Exchange Commission (SEC) for its handling of a case involving his company.

The judge expressed concern that the SEC may have made “materially false and misleading statements” to freeze millions of dollars in assets belonging to the firm.

The SEC alleged that DEBT Box defrauded investors of approximately $50 million by selling unregistered securities called “node licenses.” As part of the initial process, the SEC obtained a temporary restraining order and asset seizure through an ex parte application, meaning DEBT Box was not aware of the transactions and was unable to challenge them in court at the time.

U.S. District Judge Robert Shelby, who granted the SEC’s request, noted in his ruling that he did so based on SEC counsel’s claim that DEBT Box had effectively closed its bank accounts and attempted to move the firm to Abu Dhabi, out of the reach of U.S. regulators. However, Judge Shelby later found that these allegations were untrue.

Judge Shelby’s ruling found that no bank accounts had been closed during the specified 48-hour period and that the company had already transferred most of its operations months earlier. It also found that it was the banks, not the company, that closed some of the accounts, and that the purported $720,000 overseas transfer used by the SEC to justify the ex parte seizure was actually a domestic transfer.

The judge expressed concern about the SEC attorney’s misrepresentation regarding the closure of the accounts, especially considering the failure of other attorneys and investigators to correct their statements.

Judge Shelby concluded that the SEC may have deceived the court in disclosing the facts it used to justify the earlier decisions. He cited a federal court rule that requires written facts presented to the judge to be supported by evidence.

The judge issued a “show cause order” requesting that the court provide reasons why it should not punish the SEC for its conduct. Such orders are usually directed at private individuals and very rarely apply to government entities. The order concludes with a list of questions asking the SEC to respond to specific examples of apparent misstatements.

The federal rule cited by Judge Shelby does not prescribe specific sanctions for specific violations, but does offer a range of measures, from a financial penalty to a directive “sufficient to deter repetition of the conduct.”

*This is not investment advice.