SEC Ordered to Explain “False Statements” Leading to Asset Freeze

Published: Dec 2, 2023
Written By:
Vignesh Karunanidhi
Milk Road Writer

A federal judge has ordered the Securities and Exchange Commission (SEC) to show cause why it should not face sanctions after finding the agency made misleading statements about DEBT Box to obtain an emergency court order freezing over $49 million in assets last July.

The rebuke from Chief Judge Robert Shelby spotlights “materially false” representations, which he says undermine case integrity. In August, the SEC covertly requested Shelby freeze the assets of DEBT Box, accused of defrauding thousands through a crypto investment scheme.

The move came after SEC attorney Michael Welsh signed a sworn statement alleging the companies were actively shifting money overseas to evade regulators. Welsh also told the judge that the defendants had blocked access to social media and closed 33 bank accounts.

Key Details:

  • SEC sought Shelby’s backing through an ex parte filing, meaning without notifying defendants.
  • Asserted required emergency action given attempts to transfer assets and investor funds abroad.
  • Shelby later found the SEC’s urgent claims were misleading or outright false.
  • No proof was found that asset transfers overseas were happening when the SEC applied for an asset freeze.
  • Statements also imply the commission’s investigation was covert, which has not been established.

Shelby pointed out over a half-dozen questionable statements made by the SEC to get the asset freeze. He studied how the SEC made its case for the freeze. In October, Shelby ended the freeze after the defendants convincingly showed the commission’s claims were wrong. He also noted that the lawyers seemed unwilling to take back or correct the false information.

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Shelby demands answers from the SEC

In his new order, Shelby demands Welsh and the commission answer questions surrounding statements he believes show “a lack of candor” and commitment to factual accuracy when seeking an extraordinary pretrial remedy.

For example, Shelby asked what evidence supported allegations of recent overseas asset transfers that defendants have vigorously contested. He also ordered the SEC to address a false claim that 33 bank accounts held by defendants closed just before the asset freeze application.

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The latest order calling for an explanation is the most recent embarrassment for an SEC already struggling with well-known lawsuit mistakes. The SEC also faces accusations that it takes “weak cases” to court. The commission now has two weeks to respond to Shelby’s order.

Vignesh Karunanidhi
Milk Road Writer
Vignesh has been a seasoned professional in the crypto space since 2017. He has been writing for over 5 years and specializes in writing and editing various types of crypto content, including news articles, long-form pieces, and blog posts, all focused on sharing the beauty of blockchain and crypto.