SEC Made 'Materially False and Misleading' Representations Against Crypto Firm — Judge Threatens Sanctions

The United States District Court for the District of Utah has expressed concerns that the U.S. Securities and Exchange Commission (SEC) is making “materially false and misleading representations” in its lawsuit against a crypto firm. The court has ordered the securities regulator to show cause why it should not be subject to sanctions.

Court Threatens to Sanction SEC

The U.S. Securities and Exchange Commission (SEC) is facing renewed scrutiny for its actions in yet another legal battle involving a cryptocurrency firm.

The United States District Court for the District of Utah issued an order to show cause in the SEC v. Digital Licensing Inc. dba Debt Box, et al. case on Nov. 30, demanding the securities watchdog justify its actions. The court called out the SEC for making “materially false and misleading representations” and warned of potential sanctions if the regulator fails to provide adequate justification. The order states:

The court orders the Commission to show cause why the court should not impose sanctions.

The court is concerned about how the SEC obtained an ex parte temporary restraining order (TRO) against crypto firm Debt Box and related parties. The securities regulator requested a TRO in July. Following a hearing, the court granted the TRO, which included freezing Debt Box’s assets. Multiple defendants subsequently filed Motions to Dissolve the TRO. After a hearing, the court dissolved the TRO, concluding that it was “improvidently issued because the Commission had not shown irreparable harm.”

“TROs are extraordinary relief,” the order describes, adding that among other things, the TRO obtained in this case froze “all monies and assets . . . in all accounts” held by the defendants and related parties, and mandated that they repatriate their assets. Moreover, it was the basis of the Temporary Receivership Order, which gave the receiver “full power over all funds, assets, collateral, premises … and other property belonging to” Debt Box, its affiliates, and its subsidiaries.

The court order states:

After carefully reviewing the Commission’s filings and statements at the ex parte TRO hearing, the court is concerned the Commission made materially false and misleading representations that violated Rule 11(b) and undermined the integrity of the proceedings.

In its order, the court directed the SEC to address several critical issues. One pertains to the SEC’s claim that the defendants are actively attempting to transfer assets and investor funds overseas. The court has requested “factual support” from the SEC to substantiate this allegation. Secondly, the court has inquired about the SEC’s assertion that the defendants have obstructed the SEC’s investigation by blocking access to their social media sites and potentially deleting training materials related to the alleged scheme. Moreover, the court has asked the SEC to clarify the statement made at the TRO hearing regarding the closure of additional bank accounts by the defendants. The SEC has been granted 14 days to respond to this order.

The SEC recently lost several legal battles against crypto firms. “A troubling pattern emerges,” Ripple’s chief legal officer, Stuart Alderoty, commented on social media platform X Friday as he highlighted specific instances where the SEC’s actions were deemed questionable by the courts. On July 12, 2022, the court found that the SEC’s actions demonstrated “hypocrisy” by making consistent arguments to the court and not acting out a “faithful allegiance to the law,” Alderoty detailed. On June 6 this year, the court ruled that the SEC had neglected its duty to respond in good faith to Coinbase’s petition for crypto rulemaking. In addition, the court determined on Aug. 29 in the Grayscale v. SEC case that the SEC’s “inconsistent treatment of similar products is arbitrary and capricious.”

What do you think about the court calling out the SEC for making materially false and misleading representations against a crypto firm and threatening to sanction the regulator? Let us know in the comments section below.

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