https://fortune.com/crypto/2023/12/22/sec-error-debt-box-utah-gary-gensler-crypto/

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Regulators *Gary Gensler

SEC 'deeply regrets' errors in crypto case, asks judge to waive
sanctions after misleading statements

BYLeo Schwartz
 
 
 
 
Gary GenslerGary Gensler
Gary Gensler is chair of the Securities and Exchange Commission.
Bill Clark--Getty Images

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."

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