A federal judge has rebuked the Securities and Exchange Commission for its treatment of a cryptocurrency company, citing concerns that the agency "made materially false and misleading statements" to hide millions of dollars in assets related to the project. freeze
The suit filed in federal court in Utah is Digital Licensing Inc. or is related to a company called ZORREN Kutxa. In a complaint filed this summer, the SEC said the project defrauded investors of nearly $50 million by selling unregistered securities called "node licenses."
As part of the original process, the SEC was able to obtain a temporary restraining order and asset freeze in a so-called ex parte motion, meaning the cryptocurrency company was unaware of the proceedings and could not challenge them in court at the time.
Such unilateral proceedings are rare and occur when a government agency fears that informing the defendant could lead to the destruction of evidence or the transfer of assets abroad. Meanwhile, a temporary restraining order requires a party to prove a substantial likelihood of "irreparable harm," a high bar for clearing.
In an order issued Thursday, U.S. District Judge Robert Shelby explained that he granted the SEC's request because the agency's attorney, Michael Welsh, said the cryptocurrency company had actively closed 33 bank accounts in the past 48 hours. his company is exempt from Abu Dhabi and US regulators.
But it was a lie. In his order, Shelby argued that some of the SEC's arguments were "completely without merit and distort the record." He wrote that subsequent legal action revealed that no bank accounts had been closed during the 48-hour window and that most of the company's transactions dating back several months had already been completed. It also revealed that the banks, not the company, had closed some of the accounts, and that the $720,000 transfer used by the SEC to justify the ex parte seizure was actually a domestic transfer wash.
Shelby wrote that the SEC attorney's false statement about closing the accounts "disturbed" her because there was another attorney on the screen, as well as two off-camera investigators, who did not clarify or correct the attorney's testimony not. addressed in later documents.
The judge also said that the SEC had accused the cryptocurrency company of preventing investigators from viewing social media sites, and that the agency had not provided evidence that the company was aware of the investigation.
With all of this in mind, Shelby concluded that the SEC misled the court in describing the facts used to justify the earlier orders.
"The court is concerned that the Commission violated Rule 11(b) and made materially false and misleading statements that undermined the integrity of the judicial process," Shelby wrote, citing a federal court ruling that said written facts presented to a judge must be admitted. . . with evidence.
What Shelby filed was an "order to show cause"; in this case, he asked the SEC to provide reasons why a Utah court should not punish the agency for its actions. Although not uncommon, such orders are usually directed to individuals, and rarely to government agencies.
Thursday's order concludes with a list of questions asking the SEC to respond to specific examples of alleged falsehoods, including claims of the agency's closed bank accounts and social media blocking.
Although the tone of Shelby's order was mild, the judge expressed anger at the SEC's apparently inaccurate filings in the ex parte context and for temporary restraining orders — legal proceedings that courts generally ignore because they absolve defendants of liability. the process The judge said in a statement that he was "concerned" that the SEC had "undermined the integrity of the process."
The federal rule Shelby cites does not set specific penalties for certain violations, but instead offers a range of measures, from a fine to an injunction, "sufficient to prevent the conduct from recurring."
The show cause order comes as the SEC is embroiled in a series of high-profile lawsuits against major crypto companies, including Coinbase and Ripple. The ailing industry is likely to repeat longstanding complaints that the agency, led by Chairman Gary Gensler, is taking advantage of Shelby's order to retaliate against him.
An August report from blockchain analytics firm TRM Labs supports the SEC's main allegations that DEBT Box misled investors about mining tokens. A lawyer representing the accused declined to comment.
In response to a request for comment, an SEC spokesman said: "We have been ordered to show cause and will respond to the court as directed." »
The agency has two weeks to respond to Shelby's order.
This story was originally published on Fortune.com