SEC Lawyers Exit After Judge Raps Agency for ‘Abuse’ in Debt Box Case

Two attorneys from the United States Securities and Exchange Commission (SEC) have reportedly resigned after a federal judge reprimanded the agency for “gross abuse” of power and acting in “bad faith” in a case against the crypto platform Debt Box. The resignation of the lawyers comes as a consequence of the agency’s alleged misconduct in the high-profile crypto fraud case.

Judge Cites SEC’s ‘Gross Abuse’ of Power

According to reports, Michael Welsh and Joseph Watkins, the lead attorneys in the SEC case against Debt Box, stepped down earlier this month. Sources familiar with the situation revealed that the lawyers were warned of termination if they chose to remain at the agency. The decision to resign followed a scathing ruling by Chief Judge Robert J. Shelby, who presided over the case in Salt Lake City, Utah.

In March, Judge Shelby sanctioned the SEC for making false statements and misrepresentations in its case against Digital Licensing Inc., known as Debt Box. The judge stated in the March 18 filing that “the Commission’s above-discussed conduct constitutes a gross abuse of the power entrusted to it by Congress and substantially undermined the integrity of these proceedings and the judicial process.”

Debt Box Crypto Fraud Allegations

The SEC’s case against Debt Box stemmed from allegations of a $50 million crypto fraud scheme. In August 2022, the agency obtained an emergency relief to halt the Utah-based company, temporarily freezing its assets and obtaining restraining orders against Debt Box’s principals. Judge Shelby, however, criticized the SEC’s evidence, stating that it “lacked any basis” but was nonetheless presented in “deliberately false and misleading ways.”

The judge further highlighted the SEC’s attempts to “subtly shift the language to gloss over and perpetuate the misconduct,” referring to Welsh’s deemed incorrect statements during a hearing. Judge Shelby’s harsh rebuke prompted the resignations of Welsh and Watkins, who were relatively new to the agency, according to their LinkedIn profiles.

Regulatory Scrutiny and Industry Criticism

The crypto industry has been vocal in its criticism of the SEC’s approach under Chair Gary Gensler, particularly concerning the agency’s “regulation by enforcement” strategy. Critics argue that this approach has increased regulatory uncertainty in the industry, stifling innovation and undermining U.S. competitiveness in the digital asset space.

High-profile enforcement actions against crypto platforms have included lawsuits against crypto exchanges Coinbase and Binance and the agency’s forthcoming action over the decentralized finance platform Uniswap. The Debt Box case and the subsequent resignations of SEC lawyers have further fueled the debate surrounding the agency’s handling of crypto-related cases.

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