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On Monday, a federal judge took the unprecedented step of imposing sanctions on the Securities and Exchange Commission related to a lawsuit<\/a> the agency brought against the Utah-based crypto company DEBT Box<\/a> in July. <\/p>\n The case drew widespread attention after the defendants accused the SEC of misrepresenting key facts when the agency obtained a temporary restraining order to freeze assets on the crypto platform. After U.S. District Judge Robert Shelby ordered the SEC to explain its actions, lawyers for the agency admitted<\/a> the SEC had committed errors, but asked<\/a> Shelby not to issue a formal punishment. <\/p>\n In Monday\u2019s decision, Shelby denied the SEC\u2019s request, citing multiple instances of \u201cbad faith\u201d conduct and finding the agency responsible for a \u201cgross abuse of power.\u201d In the 80-page filing<\/a>, Shelby imposed a sanction in the form of a requirement for the agency to pay for DEBT Box\u2019s attorneys\u2019 fees and costs related to the restraining order. The judge also denied the SEC\u2019s motion to dismiss the lawsuit without prejudice, which would have meant the agency could bring the lawsuit again at a later date. <\/p>\n \u201c[The SEC\u2019s conduct] substantially undermined the integrity of these proceedings and the judicial process,\u201d Shelby wrote. <\/p>\n DEBT Box is a little-known crypto firm that offered investment vehicles in the form of \u201cnode software licenses\u201d that allowed customers to mine different digital assets. The SEC first sued the firm in July, alleging the project had defrauded investors out of nearly $50 million by selling unregistered securities. Before the case was unsealed, the agency took the drastic step of requesting an ex parte<\/em> temporary restraining order\u2014an extraordinary step that does not even notify the defendant of the proceedings, and is typically granted only when there is a serious risk they will destroy evidence or flee the U.S. In the DEBT Box case, the SEC claimed the company was actively closing its bank accounts and seeking to move out of the country. <\/p>\n While Shelby initially granted the SEC\u2019s request, lawyers for the defendants later flagged that the agency had misrepresented information in its request for the restraining order, including that the firm was aware of the investigation and was taking steps to flee the country. In a December order, Shelby asked<\/a> the SEC to provide evidence to back up the restraining order. <\/p>\n A few weeks later, the agency filed a response admitting to mistakes, with SEC enforcement chief Gurbir Grewal apologizing<\/a> for the \u201cshortfall\u201d in the case. Still, agency lawyers asked Shelby to waive sanctions, arguing that its staff had not engaged in \u201cbad faith conduct.\u201d In January, the SEC moved<\/a> to dismiss the case without prejudice, once again arguing that sanctions were not appropriate and that case law dictated the agency could not be on the hook for monetary penalties.<\/p>\n Despite the agency\u2019s apology, the case quickly became a lightning rod for both the crypto industry and sympathetic politicians who have long complained about the zealous campaign of enforcement against the blockchain sector under Chair Gary Gensler<\/a>. In February, a group of Republican senators sent a letter<\/a> to Gensler expressing concern over the lawsuit, arguing that trust in the agency was \u201cundermined.\u201d<\/p>\n Shelby\u2019s ruling on Monday is a vindication for DEBT Box and the SEC\u2019s critics, with the judge finding that the agency understood the critical evidence used to obtain the restraining order \u201clacked any basis.\u201d<\/p>\n Still, Shelby wrote, \u201cThe Commission nonetheless advanced that evidence in deliberately false and misleading ways.\u201d<\/p>\n In his decision, Shelby took particular issue with the SEC\u2019s position as a federal agency, with agency lawyers citing its \u201cspecial standing\u201d when requesting the restraining order. By granting the initial order, Shelby wrote, \u201clives were upended.\u201d Furthermore, he argued that the SEC not only repeated the factual errors in later representations but presented \u201cnew falsehoods to the court.\u201d<\/p>\n \u201cThe court cannot write these issues off as non-willful, inadvertent mistakes,\u201d he wrote. <\/p>\n With leading crypto companies embroiled in lawsuits with the SEC, the strongly worded decision will add to the scrutiny of Gensler\u2019s approach to policing the industry. \u201cThe Commission just foisted a bill onto every one of us for their litigation misconduct,\u201d tweeted<\/a> Coinbase<\/a> chief legal officer Paul Grewal, whose company is currently seeking to dismiss<\/a> an SEC lawsuit alleging that the exchange\u2019s business model violates securities law. <\/p>\n \u201cWe are reviewing the decision,\u201d said in an SEC spokesperson in response to a request for comment from Fortune<\/em>. <\/p>\n<\/div>\n\n\u2018Bad faith conduct\u2019<\/h2>\n
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