Two lawyers from the Securities and Exchange Commission (SEC), Michael Welsh and Joseph Watkins, have resigned following criticism from a federal judge regarding the handling of a crypto-related case involving Digital Licensing Inc., known as DEBT Box. The SEC’s legal unit initially convinced the court to freeze DEBT Box’s assets by claiming the company was moving to Dubai out of U.S. regulatory reach. However, Judge Robert Shelby in Salt Lake City later sanctioned and criticized the SEC for what he deemed as a “gross abuse” of power in the case.
After being informed that they would face termination if they stayed, Welsh and Watkins chose to resign from their positions at the SEC. The lawsuit against DEBT Box was met with allegations of false statements, misrepresentations, and a lack of evidence, leading to the court sanctioning the SEC. The agency’s head of enforcement apologized for the missteps in the case, which accused DEBT Box of defrauding investors of at least $50 million in July 2023.
Judge Shelby criticized Welsh’s arguments and the evidence presented by Watkins and his team, including claims that DEBT Box was moving assets overseas, which were later found to be untrue. The defendants challenged the SEC’s claims, alleging that the regulator had misrepresented facts to obtain a temporary restraining order freezing DEBT Box’s assets. The SEC subsequently withdrew the lawsuit in January, but Judge Shelby declined to dismiss the case “without prejudice,” preventing the SEC from refiling it at a later date.
In response to the court’s scrutiny, the SEC acknowledged errors in its approach and expressed regret for the department’s actions. New attorneys have been appointed, and training for enforcement staff has been mandated to address the situation. Motions have been filed seeking reimbursement from the SEC for legal fees and expenses totaling over $1.5 million incurred during the DEBT Box case.
The DEBT Box case underwent an unexpected twist, with defendants challenging the SEC’s claims. Judge Shelby called upon the SEC to justify its actions and criticized SEC attorney Michael Welsh for misleading the court and obscuring the truth. Despite the SEC’s acknowledgement of errors and lack of transparency in the case, formal sanctions were not imposed. The judge’s decision to decline dismissal without prejudice allowed for potential future filings by the SEC, pending further justification for their actions in the DEBT Box case.
