Utah Federal Judge Scrutinizes SEC’s Conduct in Crypto Firm Case, Considers Sanctions

Utah’s Chief District Judge Robert J. Shelby has mandated the Securities and Exchange Commission (SEC) to clarify its statements related to a temporary restraining order (TRO) against cryptocurrency company DEBT Box, following a recent court development.

In October, the TRO was lifted by Judge Shelby after he identified several SEC claims as “false or misleading.” The SEC initially argued that DEBT Box was transferring assets abroad to elude SEC jurisdiction, alleging the company closed bank accounts in June 2023 to shift investor funds overseas, specifically to the United Arab Emirates, to avoid U.S. securities laws.

During a hearing on July 28 regarding the TRO, the SEC’s assertion that the defendants had closed 33 bank accounts in the preceding 48 hours was deemed by Shelby as “the most significant evidence” of DEBT Box’s attempt to move funds abroad. This evidence, coupled with the SEC’s statements that the defendants were obstructing investigators from accessing certain social media pages, led to the TRO’s approval.

However, DEBT Box disputed these claims in a September motion to dissolve the TRO, clarifying that no bank accounts were closed in June or July 2023. In fact, 13 bank accounts were closed before or by January 2023, with nine closures initiated by the banks themselves.

“There was no evidence that any bank accounts closed in the 48 hours preceding the ex parte hearing,” stated Shelby in his official filing.

Furthermore, Judge Shelby criticized the SEC’s interpretations of the defendants’ statements as misleading and questioned the SEC’s claim about the defendants blocking social media access, considering the SEC’s investigation was described as “covert.”

Shelby expressed his concerns about the SEC potentially making “materially false and misleading representations” in its argument for the TRO, an action he described as ‘extraordinary relief’. This led to the appointment of a Temporary Receiver with extensive control over DEBT Box’s assets and operations.

Consequently, Shelby has directed the SEC to justify why its lawyers should not face sanctions and posed several inquiries regarding the evidence supporting their court representations. For instance, he asked, “If the investigation had been covert, what factual support did counsel possess and rely on when representing Defendants had ‘taken action to block SEC investigative staff from viewing their social media sites?’”

The potential sanctions, intended to deter such conduct in the future, might include financial penalties or non-monetary directives. The SEC, with a 14-day deadline to respond, acknowledged the order, stating, “We are in receipt of the order to show cause and will respond to the court as directed.”