A federal judge calls for the SEC to justify its use of allegedly misleading evidence in obtaining a restraining order against a crypto firm.
In a recent legal development, federal judge Robert Shelby has issued a directive to the US Securities and Exchange Commission (SEC), demanding an explanation for what he perceives as deceitful actions. The judge is questioning why SEC attorneys allegedly presented misleading evidence to secure a temporary restraining order against Digital Licensing and DEBT Box in July 2023.
Judge Shelby's concern arises from an order to show cause, filed in Ohio, which scrutinizes the SEC's actions during the asset freeze of Digital Licensing (operating as DEBT Box). The SEC had accused the company of selling an unregistered security and defrauding investors of around $49 million. They claimed that DEBT Box was transferring assets and investor funds abroad.
In their quest for a temporary restraining order (TRO) to immobilize the company's assets, the SEC's legal team pointed to bank statements and account closures as proof of international fund movement.
During a TRO hearing in July, SEC attorney Welsh indicated to the court that the defendants had closed approximately 33 bank accounts in the preceding 48 hours. Judge Shelby interpreted these remarks as an assertion that these closures happened within a two-day window, along with allegations that DEBT Box was blocking the SEC's access to its social media. Based on this, a ten-day TRO was granted and later renewed multiple times.
In September, two groups of defendants and relief defendants requested the dissolution of the TRO, accusing the SEC of misleading the court initially. Judge Shelby noted that the SEC subsequently "tacitly acknowledged" that no bank accounts were closed in July 2023 and that any closed accounts were shut down by banks, not the defendants. The TRO was dissolved in October 2023.
During the hearing for the TRO's dissolution, Welsh admitted the SEC was unaware of the reasons behind the bank account closures and had no evidence of funds being moved overseas since January 2023. The judge also expressed concern over Welsh's previous statements about the bank accounts, which were not directly addressed by Welsh or the SEC.
Shelby highlighted the lack of intervention by another SEC attorney present at the TRO hearing and two investigative staff members, who did not correct or clarify Welsh's statement.
This incident has stirred discussions among industry insiders, who view it as part of a "troubling pattern" in the SEC's recent behavior.
Austin Campbell, founder and managing partner of Zero Knowledge Consulting, remarked, “This kind of behavior is alarmingly egregious, even for the SEC. The potential sanctions against the SEC for these misrepresentations could draw significant attention in the crypto community, particularly among entities like Binance, Kraken, and co-founder Jesse Powell.”
The SEC, having received the court's order, has stated through a spokesperson that it will respond as directed. Defense team members have opted not to comment on the matter.