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Judge Rebukes SEC’s Conduct in Crypto Case: Threatens Agency Sanctions

A federal judge has strongly criticized the Securities and Exchange Commission (SEC), raising concerns about the agency’s conduct in freezing assets of a crypto firm. The judge accused the SEC of making false and misleading representations to obtain a temporary restraining order and asset seizure without the crypto company’s knowledge or chance to contest it in court.

The case involving Digital Licensing Inc., known as DEBT Box, alleged by the SEC for defrauding investors of around $50 million through unregistered securities called “node licenses,” raised red flags due to the SEC’s actions. The judge, U.S. District Judge Robert Shelby, expressed dismay at the SEC’s attorney, Michael Welsh, who claimed the crypto company was swiftly moving assets offshore. However, subsequent investigations revealed these claims were baseless, with no accounts closed in the alleged time frame and operations relocated much earlier than stated.

Judge Shelby highlighted his concern over the SEC’s attorney’s misrepresentations, pointing out discrepancies and misstatements in the SEC’s arguments. The court found no evidence supporting the SEC’s claims that the company obstructed investigators from accessing social media, raising doubts about the accuracy of the facts presented to justify the previous orders.

Shelby’s order calls for the SEC to explain why it should not face consequences for potentially deceiving the court, citing violations of federal court rules mandating factual evidence in submissions. Such orders are rare and directed more often at private entities than government agencies. Shelby’s concerns extend beyond mere disagreement, indicating that the SEC’s actions might have compromised the integrity of the legal process.

The judge’s order doesn’t specify particular penalties but suggests potential measures to prevent recurrence of such conduct, ranging from financial penalties to directives aiming to deter similar behavior in the future.

This reprimand of the SEC arrives amid ongoing lawsuits involving the agency and major crypto companies, setting the stage for a possible reevaluation of the SEC’s approach under Chairman Gary Gensler. The SEC has been asked to respond to Shelby’s order within two weeks.

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