Attorneys for the Securities and Exchange Commission apologized to a judge on Thursday for misrepresenting facts used to secure a restraining order and asset freeze against a crypto firm.
In a filing submitted to the U.S. District Court of Utah, in response to the judge’s order to show cause for its misstep, the SEC attorneys wrote that the commission “deeply regrets these orders” and promised to conduct mandatory training for staff members involved in the investigation.
“I fully appreciate the extraordinary responsibility entrusted to the SEC when enforcing federal securities laws,” wrote SEC enforcement chief Gurbir Grewal. “I understand that the division fell short of these standards in this case, and I apologize for that shortfall.”
The rare rebuke of the agency stemmed from litigation filed by the SEC in July against the crypto firm Digital Licensing Inc., or DEBT Box. In the complaint, the SEC alleged that the project had defrauded investors out of nearly $50 million.
As part of the lawsuit, the SEC sought a temporary restraining order and asset seizure against the firm and its directors, arguing before U.S. District Judge Robert Shelby that the defendants were seeking to move operations overseas to avoid regulatory oversight. To ensure that DEBT Box could not empty its bank accounts before the SEC took action, the agency filed an ex parte application, meaning the firm was not informed of the proceedings and could not challenge the motion in court.
After the judge approved the order, the defendants challenged that the SEC was misrepresenting facts. For example, the bank had closed some of its accounts, not the project itself, and the company had transferred much of its operations months before the lawsuit, not immediately preceding it.
After the revelation, the judge issued a strongly worded order asking the SEC to explain its actions, writing that he was “concerned” that the agency had “made materially false and misleading representations … and undermined the integrity of the proceedings.”
With SEC Chair Gary Gensler escalating his campaign of enforcement actions against crypto firms, many in the industry pointed to the case as an example of the agency moving too aggressively against the sector.
‘Lapses in judgment’
In the 27-page response filed on Thursday, SEC attorneys acknowledged that the agency “fell short.”
“The commission cannot let its zeal to stop ongoing fraud interfere with its duty to be accurate and candid,” the filing states.
While the judge cited potential sanctions against the agency, SEC attorneys said that mandatory training would suffice, arguing that its staff had not engaged in “bad faith conduct.”
According to the filing, the SEC assigned a new team of attorneys from the agency’s Office of the General Counsel to assess its missteps, arguing that it concluded its staff “did not intend to mislead the court.”
Instead, because of the haste to prepare applications for emergency relief, staff made errors in presenting and contextualizing its evidence. For example, SEC staff did not have direct evidence of recent overseas transfers by DEBT Box, but instead was making an inference based on a YouTube video by one of the defendants.
Furthermore, while the SEC admitted that its investigation was covert, its staff had interacted with certain defendants’ social media pages in such a way that the staff believed it could have alerted them to the investigation. In one instance, SEC staff said that some of the defendants’ YouTube videos had been taken down and that Instagram accounts had been blocked.
“The commission,” according to the filing, “has identified errors and lapses in judgment that it will take steps to remedy.”