Utah judge denies SEC's motion to dismiss DEBT Box case, imposes sanctions

A federal judge ruled on Monday that the Securities and Exchange Commission acted in bad faith and must pay sanctions, including attorneys' fees and costs, stemming from a case it brought against crypto startup DEBT Box. 

Utah U.S. District Court Judge Robert Shelby said the SEC would have to pay legal costs arising from a temporary restraining order imposed on Digital Licensing Inc., doing business as DEBT Box, last year. According to the court order, the judge also denied the SEC's move to dismiss the case without prejudice. The case involved the judge criticizing the SEC's misleading statements and the agency admitting that it had fallen short of expectations. 

Throughout the 80-page order, Judge Shelby criticized the SEC's conduct in getting the temporary restraining order (TRO), which included an asset freeze and a court-appointed receiver to assume control of the company. 

"It expressly traded on its special standing as a federal agency—reminding the court it had been granted this relief several times in the past ten years—to demonstrate it could be trusted when asking for this tremendous exercise of judicial authority," Shelby said. 

The court granted the TRO, which caused assets to be frozen and "lives were upended," Shelby said. 

"In the end, once Defendants had notice and an opportunity to respond, each purportedly factual pillar the Commission constructed to make the required showing of irreparable harm crumbled under scrutiny," Shelby said. "It was not just a single imprecise statement or inadvertent misstatement. Each piece of support the Commission offered in seeking the TRO—and then later reiterated in defending the TRO—proved to be some combination of false, mischaracterized, and misleading." 

An SEC spokesperson said the agency was reviewing the decision, in an emailed statement to The Block. 

The motion to dismiss

The SEC filed a motion to dismiss the lawsuit without prejudice in January, meaning the regulator could have refiled its case. Judge Shelby denied that on Monday. 

The SEC admitted in late December that it made inaccurate statements and said it "fell short" of the expectations to be accurate and candid in court. Judge Shelby had criticized the agency's lawyers and ordered the SEC to explain "false or misleading" statements after it claimed the company was trying to move assets overseas to escape the regulator's jurisdiction.

The SEC's suit against DEBT Box alleged it defrauded thousands of investors of at least $49 million by offering customers so-called "node licenses" to receive revenue from mining 11 tokens, though they were never mined.