A federal judge in Utah has sanctioned attorneys for the Securities and Exchange Commission, saying their arguments to freeze the assets of a Utah-based cryptocurrency company contained misleading evidence.
SEC lawyers last July successfully filed a motion for a temporary restraining order and asset freeze against DEBT Box, alleging that company executives abruptly moved assets to foreign banks and that the move allowed the company to “evade law enforcement.'' '' He suggested that this was evidence of intent.
In a ruling issued Monday, Chief Judge Robert J. Shelby of the U.S. District Court for the District of Utah said the SEC's claims were incomplete and partially untrue. Shelby ruled that lawyers for the federal financial watchdog presented misleading evidence to obtain a restraining order and failed to correct their records when given the opportunity.
The actions of SEC lawyers “represent a gross abuse of the authority delegated to them by Congress and substantially undermine the integrity of these proceedings and the judicial process,” Shelby wrote.
Shelby repeatedly called the SEC's actions “problematic” in his 80-page decision and analysis and said the lawyers acted in “malice” in an attempt to get their way. The federal agency will now have to pay attorneys' fees for DEBT Box and its co-defendants, as well as other legal costs associated with the temporary restraining order and asset freeze.
But Shelby also denied the SEC's motion to dismiss the case for now.
An SEC spokesperson said the agency is reviewing Shelby's decision. SEC lawyers said in previous filings that they did not intend to mislead the court and argued there is still evidence that DEBT boxes have harmed and continue to harm investors.
Richard Hong, lead attorney for Draper-based DEBT Box, declined to comment on the case Wednesday, citing the pending litigation.
suspected fraud
Last summer, the SEC filed a complaint against DEBT Box and about 20 affiliated individuals and entities, alleging that the cryptocurrency broker lied to investors about “virtually every aspect” of its business and enriched itself with fraudulent profits. submitted.
DEBT Box is the public trade name of Digital Licensing, Inc., which describes itself as a “decentralized and environmentally friendly blockchain technology project.” Investors can purchase software “nodes” to build their own blockchain networks with less energy than traditional crypto mining, and buyers can “earn rewards from several asset classes from the comfort and convenience of their home.” ,” the website claims. The company also claims its projects are safe for investors because they are “backed by royalties from real-world industries and the production and sale of goods.”
In a complaint unsealed in July, the SEC said that DEBT Box's principals, brothers Jason and Jacob Anderson and brothers Shad Brannon and Roydon Nelson, were not registered cryptocurrency brokers, and therefore They claimed they were selling “fake” tokens, which are worthless virtual currencies.
“And rather than using investor funds generated from the sale of Node software licenses to support their underlying businesses, defendants diverted those funds for personal gain, including luxury cars. He showered himself and his friends with cash, buying homes and taking lavish vacations.
restrained and frozen
In July, the SEC granted Shelby a temporary restraining order against DEBT Box and its affiliates and asked it to freeze the company's assets. According to Monday's ruling, Shelby was prepared to reject the case, arguing that SEC lawyers had not proven key elements such as “irreparable harm.”
The SEC's attorneys doubled, according to the ruling. Central to the SEC's argument for obtaining a restraining order was the fact that DEBT Box and its principals were moving funds overseas, including to banks in the United Arab Emirates.
“[Defendants] They said in the video that the reason they were doing this was to circumvent the SEC's jurisdiction,'' SEC lawyers argued in July.
Later, in a “final attempt” to persuade Shelby to grant him a restraining order, SEC attorney Michael Welsh told the judge that “investigative staff has reminded us that…in the past 48 hours… The defendant also closed additional bank accounts and I don't have them with me, but I believe the number of bank accounts was approximately 33.
The revelations were “the most important evidence” that DEBT Box officials were trying to evade authority and conceal funds, and were enough to convince a judge to issue a restraining order, the statement said. Shelby said.
But that was not entirely true, the sanctions order states. And when confronted about the accuracy of that fact, SEC lawyers did not correct the record.
“Not only was the account not closed in the 48 hours prior to the hearing, but the account was not closed for the entire month of July 2023,” Shelby wrote in the sanctions order.
According to court documents, SEC lawyers ultimately acknowledged that their statements were “inaccurate” and based on a “misunderstanding,” but argued that the facts were “immaterial” to the overall case. .
Shelby didn't buy it.
“Given these circumstances, it is difficult to accept that Commission staff did not believe the misstatements were material,” Shelby wrote. “Indeed, this was probably the most important and influential representation made in support of the Commission's…application.”
Shelby also determined that the SEC took Jacob Anderson's statements out of context. SEC lawyers pointed to a YouTube video in which Mr. Anderson admitted that DEBT Box had moved its operations to Abu Dhabi so that it would be “under the jurisdiction of Abu Dhabi and not the SEC.” The statement was submitted as evidence that the defendants were attempting to circumvent U.S. authority by moving assets overseas.
Instead, the court concluded that the statement was made in response to a viewer question regarding “the SEC's squeeze on cryptocurrencies and its potential impact on DEBT boxes.” Anderson said Abu Dhabi is providing a “clearer regulatory framework” for crypto brokers. While DEBT Box did move its operations overseas, the video was not evidence of evasion or proof that the defendants were “in the process of transferring assets or funds offshore,” Shelby said. ruled.
Shelby revoked the restraining order and freezing order in November after reviewing the evidence and finding it misleading at best. The SEC apologized in December and asked the court not to impose sanctions, according to court documents.
But Shelby ruled that the SEC acted in “subjective bad faith” and that the sanctions were appropriate.
“Significant evidence submitted by the Commission to obtain and defend the ex parte TRO [temporary restraining order] “The committee intentionally asserted that evidence in a false and misleading manner, when in fact it lacked any basis,” Shelby wrote. “Furthermore, this was done for an improper purpose, abusing the power of the court to impose special relief on the defendants that the committee would not have received had it spoken up to the court.” It is a relief.”
case [not] fired
Mr. Shelby also denied the SEC's motion to dismiss the case outright for now. The SEC filed a motion in February to allow regulators to “complete their review of the record” and eventually resubmit.
According to the complaint, the agency said it would refile the case against DEBT Box, claiming there is still evidence of “past and ongoing harm to retail investors.”
Shelby said the SEC's complaint does not meet the Utah district court's local requirements and “no legal authority or argument is provided in support of the request.”
Therefore, the SEC's case against DEBT Box will move forward for now. The SEC argued in its complaint that there is still evidence that “retail investors have been and are being harmed.”
Shannon Sollitto is Report for America Business Accountability and Sustainability Officer of the Salt Lake Tribune. Your gift, matched by an RFA grant, will help her keep writing stories like this one. Click to consider making a tax-deductible gift of any amount today. here.
