SEC hit with sanctions for its ‘gross abuse of power’ in Debt Box case

The SEC initially conceded it misled the court but argued a sanction wasn’t appropriate.

A United States district court has imposed sanctions on the Securities and Exchange Commission (SEC) for acting in “bad faith” in a lawsuit it brought against Debt Box.

The SEC initially filed a motion to dismiss without prejudice but that was denied by Judge Robert J. Shelby, who slammed the regulator for intentionally lying to the court about evidence it obtained to secure a temporary restraining order (TRO) and freeze of Debt Box’s assets last August.

“The Commission’s above-discussed conduct constitutes a gross abuse of the power entrusted to it by Congress and substantially undermined the integrity of these proceedings and the judicial process,” Shelby said in the March 18 filing.

The “critical evidence” the SEC offered to obtained “lacked any basis” which was nonetheless advanced in “deliberately false and misleading ways,” Shelby explained.

“The bad faith in inextricable from the abusive conduct and a sanction of attorneys’ fees and costs for all expenses resulting from that conduct is appropriate,” said Shelby.

In its August lawsuit, the SEC claimed Debt Box perpetrated a $50 million fraudulent cryptocurrency scheme amid its operations as a software mining license provider. In requesting the TRO and asset freeze, the regulator claimed Debt Box had already sent $720,000 overseas and would flee to the United Arab Emirates and secretly transfer more assets with it if it was notified of the order.

The request was initially approved. However, Shelby later reviewed his initial order and concluded the SEC misrepresented evidence and that the $720,000 transfer was instead sent within the United States.

In December, Judge Shelby gave the SEC a “show cause order” — a type of court order that requires a party to justify, explain or prove something to the court. While the SEC accepted its actions weren’t “forthcoming,” the regulator argued a sanction wasn’t appropriate.

Related: US senators call SEC actions in Debt Box case ‘unconscionable’

Shelby took aim at SEC attorney Michael Welsh for misleading the court and attempting to obfuscate:

“Welsh knew his statement from the TRO hearing was incorrect. Rather than correcting the misstatement, he and the Commission attempted to subtly shift the language to gloss over and perpetuate the misconduct.”

Austin Campbell, founder of Zero Knowledge Consulting said the SEC staff involved should be “terminated” and that the agency needs to undergo a reform.

“SEC lawyers should have personal liability for such conduct, in addition to the agency itself. What is described here is unconscionable for those entrusted with such authority by law.”

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