Federal Judge Warns SEC of Potential Sanctions in Cryptocurrency Fraud Case

U.S. District Judge Robert Shelby issued a warning to attorneys of the Securities and Exchange Commission (SEC), threatening sanctions over alleged misleading statements in a lawsuit against Digital Licensing Inc., also known as DEBT Box, a cryptocurrency firm.

Filed in Utah Federal court, the SEC’s suit accused DEBT Box of defrauding investors out of approximately $50 million through the sale of unregistered securities, referred to as “node licenses.”

Judge Shelby’s ruling brought to light significant inconsistencies in the SEC’s presentation. Initially, the SEC, led by attorney Michael Welsh, had convinced the court to freeze DEBT Box’s assets, arguing the company was moving to Dubai, beyond U.S. regulatory reach. However, it was later found that these claims were inaccurate, with no bank account closures and an alleged overseas transfer of $720,000 actually being domestic.

Concerns Over SEC Attorneys’ Conduct

The judge expressed concerns over the conduct of the SEC attorneys. Their misrepresentation of facts and the failure of other staff members to correct these inaccuracies potentially violated federal court Rule 11(b), which requires that factual claims be supported by evidence. This led to the issuance of a “show cause order” from Shelby, demanding the SEC to explain why they should not face penalties for these actions.

Ongoing Legal Proceedings

The complexity of the case is further highlighted by a TRM Labs report supporting the SEC’s main allegation that DEBT Box misled investors about mining tokens. The defendants’ attorney has not commented on the matter, while the SEC has acknowledged the order and intends to respond within the two-week deadline set by Judge Shelby.

This development marks a critical point in the legal proceedings, emphasizing the challenges in cryptocurrency regulation and the importance of legal accountability in high-stakes financial litigation.