SEC Sanctioned for "Bad Faith" in Action Against Crypto Firm
Commentary by Steven Lofchie
The SEC was sanctioned for presenting false and misleading evidence in obtaining a temporary restraining order ("TRO") and asset freeze against a crypto firm. Judge Robert J. Shelby delivered the ruling, calling the SEC's actions toward the crypto firm a "gross abuse of power."
The SEC sued the crypto firm in July 2023, accusing the firm of defrauding investors of approximately $50 million through a scheme involving "node licenses." According to the lawsuit, the licenses entitled holders to profits from mining 11 different cryptocurrencies. The SEC claimed these tokens were never actually mined, raising questions about the legitimacy of the entire operation. In requesting the TRO and asset freeze, the SEC claimed the crypto firm (i) had already sent $720,000 overseas, (ii) would flee to the United Arab Emirates and (iii) would secretly transfer more assets with it if it was notified of the Order. As a result, the Court froze the company’s assets and placed it in receivership at the SEC’s request. The Court reversed this freeze later, concluding that the evidence the SEC presented turned out to be "false, mischaracterized, and misleading." After review, Judge Shelby found that the $720,000 transfer was instead sent within the United States.
In the 80-page ruling, Judge Shelby highlighted several missteps by the SEC. He said the "critical evidence" the SEC offered to have obtained "lacked any basis" but was nonetheless advanced in "deliberately false and misleading ways." The SEC was sanctioned and mandated to refund the crypto firm for attorney fees and additional expenses incurred from the SEC's pursuit of the restraining order.
The SEC opted to withdraw the lawsuit entirely in January, expressing intent to assess the evidence and understand the factors that might have led its legal representatives to initially make inaccurate statements to the Court. SEC Enforcement Director Gurbir Grewal apologized to Judge Shelby for inaccuracies in the case, assuring the Court that measures would be implemented to prevent similar errors in the future. Judge Shelby refused to dismiss the case "without prejudice."
Commentary
This case raises questions as to whether the failures were specific to the attorneys involved or were indicative of broader issues. Might the SEC's actions reflect a political hostility toward crypto that encouraged SEC attorneys to be aggressive to the point of "gross abuse of power"? Is this case another example of the SEC's willingness to take positions which stretch the bounds of its authority, similar to its pursuit of rules under procedures that fail to comply with the Administrative Procedure Act?
As to the SEC's hostility toward crypto, see, e.g., Court Vacates SEC Refusal to Allow Exchange-Listing of Bitcoin Trusts (where the Court described the SEC's position as "arbitrary and capricious"). Further, and notwithstanding being chastised about its unsupportable refusal to allow the listing of ETFs based on Bitcoins, the SEC now seems to be engaged in delaying tactics as to the listing of similar ETFs based on Ethereum.
As to the SEC's aggressive approach to rulemaking, see, e.g., Witnesses at HFS Oversight Hearing Critique SEC Regulatory Approach; Private Funds Associations Sue SEC to Vacate New "Dealer Rule"; Witnesses Criticize SEC Climate Disclosure Rule; SEC Commissioner Uyeda Warns of Government Overreach.