SEC sanctioned for ‘gross abuse of power’ in debt fund case.

A United States District Court has imposed sanctions against the Securities and Exchange Commission (SEC) for “bad faith” in its lawsuit against Debt Fund.

The SEC initially denied it without prejudice, but this was overturned by Judge Robert J. Shelby, who accused the regulator of deliberately lying to the court about the evidence it had obtained to block the temporary restraining order (TRO) and the debt fund's assets. Last August.

“The commission's conduct discussed above constitutes an abuse of power vested in Congress and seriously undermines the integrity and due process of these proceedings,” Shelby wrote in a March 18 filing.

Shelby explained that the “substantial evidence” that the SEC sought to obtain “has no basis” but is advanced in “deliberately misleading and deceptive ways.”

“Bad faith and attorneys' fees and costs incurred in connection with that conduct are inextricably linked,” Shelby said.

In an August indictment, the SEC alleged that DebtBox carried out a $50 million cryptocurrency fraud scheme while operating as a software mining license provider. When the regulator sought the TRO and freezing of assets, Debt Box said he would send $720,000 overseas to the United Arab Emirates and secretly transfer more assets if notified of the order.

The request was initially approved. However, Shelby reviewed the initial order and concluded that the SEC misrepresented the information and that the $720,000 transfer was instead sent to the United States.

In December, Judge Shelby granted the SEC a “show order” — a type of court order that requires a party to prove, explain or prove something to the court. While the SEC acknowledged that the actions were not “imminent,” the regulator argued that sanctions were inappropriate.

Related: US Senators Call SEC Actions in Debt Box ‘Unthinkable'

Shelby took aim at SEC attorney Michael Welsh for misleading and obfuscating the court:

“Welsh knew his statements from the TRO hearing were inaccurate. Instead of correcting the misrepresentation, he and the Commission attempted to subtly explain the language and perpetuate the offense.”

Austin Campbell, founder of Zero Knowledge Consulting, said the SEC's staff needs to be “disengaged” and the agency needs to reform.

“SEC attorneys should be held personally liable in addition to the agency for such actions. What is stated here is unthinkable for those who are empowered by law to do so.”

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