US federal judge orders SEC to disclose reasons for allegedly suing virtual currency company with insufficient evidence

Seek clarification from SEC lawyers

On November 30, Judge Robert Shelby of the U.S. District Court for the District of Utah ruled that the U.S. may have presented “misleading” evidence to persuade the court to freeze the assets of crypto-asset (virtual currency) companies. The Securities and Exchange Commission (SEC) was ordered to explain why.

In the lawsuit, filed in July, the SEC alleges that Digital Licensing Inc. (also known as DEBT Box) sold unregistered securities called “node licenses” to thousands of investors for $49 million (approximately $7.2 billion). yen) Claimed to have defrauded the customer. It has filed an application seeking a temporary restraining order (TRO) against the company.

After a hearing with the SEC, the Utah District Court issued a TRO freezing DEBT Box’s assets, but in September the defendants filed a motion to revoke the TRO. At the hearing on this petition, the court concluded that the TRO was inadvertently issued and vacated the TRO because the SEC did not show that failure to issue the TRO would cause “irreparable harm.”

During the hearing, the court found that some of the statements made by the SEC in support of the TRO application were “false or misleading.” He said he may seek clarification from the SEC at a later date.

SEC’s claim

According to the disclosure order, the SEC alleges that the defendant is attempting to transfer assets and investor funds overseas as the basis for the TRO. He cited bank statements and account closures as evidence. Additionally, SEC attorney Michael Welsh testified in court as follows:

The court interpreted this testimony to mean that the defendant closed 33 bank accounts within 48 hours.

Additionally, this, combined with the SEC’s allegation that the defendants made the social media sites inaccessible to SEC investigative staff, is the most important evidence that “immediate irreparable harm will result unless a TRO and asset freeze is issued.” The court has decided that.

Defendant’s argument and evidence

Meanwhile, the defendants argued in their September motion to cancel the TRO that the SEC misled the court.

There were no account closures in July when Attorney Welsh testified, and he provided documents showing 13 DEBT Box accounts that had been closed by January 2023. He refuted the “closure of 33 accounts within 48 hours” as baseless. Additionally, the account had been closed by the bank, not the defendant.

According to Judge Shelby’s document, the SEC also “tacitly acknowledged” this fact.

The TRO against DEBT Box was canceled in October.

court concerns

In the order to disclose reasons, the court presents the following arguments.

• SEC made materially false and misleading representations in violation of Rule 11 of the Rules of Civil Procedure
• This statement was made by a federal agency
• A TRO is an emergency measure that gives the trustee significant powers, including freezing all accounts and assets held by the defendant.
• In consideration of this special authority, the court pays close attention to the circumstances surrounding the acquisition of a TRO.

For these reasons, the court ordered the SEC to “show cause why the court should not impose sanctions on the SEC.”

The SEC has been asked to provide a response within two weeks.

connection:U.S. House of Representatives passes industry protection bill banning use of funds used to crack down on SEC crypto companies

connection:U.S. government watchdog GAO says “SEC virtual currency accounting bulletin is subject to Congressional review” – will it nail the SEC’s act of overstepping its authority?

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