Two SEC Lawyers Resign After Agency Censured for Abuse of Power in Crypto Case

(Bloomberg) -- Two Securities and Exchange Commission lawyers resigned after a federal judge sanctioned and sharply rebuked the Wall Street regulator for “gross abuse” of power in a crypto case. 

Michael Welsh and Joseph Watkins stepped down this month after an SEC official told them that they would be terminated if they stayed, according to people familiar with the matter. The pair were lead attorneys on a case against Digital Licensing Inc., a crypto platform known as DEBT Box.

The regulator’s lawsuit against DEBT Box was marred by false statements and misrepresentations, as well as a lack of evidence, according to Robert Shelby, the federal district court judge in Salt Lake City who is hearing the case. Shelby took the extreme step of sanctioning the agency for abuse of power in March, and the SEC’s head of enforcement has apologized for the missteps.

Neither Welsh nor Watkins, who were based out of the regulator’s Salt Lake City office, responded to phone calls requesting comment. The SEC declined to comment, as did a representative of the union representing agency staff.

In July, the SEC accused DEBT Box and its executives of defrauding investors of at least $49 million. At the regulator’s request, Shelby froze the company’s assets and put the firm into receivership.

But the asset freeze was reversed after Shelby found that the SEC may have made “materially false and misleading representations.” The judge would go on to sanction the SEC for “gross abuse of the power entrusted to it by Congress” and ordered the agency to pay some of DEBT Box’s attorney’s fees.

Shelby faulted arguments from Welsh, the SEC’s lead trial attorney on the matter, and evidence provided by Watkins and his team. Watkins was the agency’s lead investigative attorney on the case.

In one instance, Welsh told the judge that Draper, Utah-based DEBT Box was closing bank accounts and transferring assets overseas. The court found that this wasn’t happening. An SEC investigator later said that a miscommunication led to the error, and Welsh apologized to the court.

In December, SEC enforcement chief Gurbir Grewal apologized to the court for his department’s conduct. He said that he had appointed new attorneys to the case and mandated training for the agency’s enforcement staff. 

A lawyer for DEBT Box declined to comment. Last week, attorneys for DEBT Box and other parties filed motions requesting that the SEC pay more than $1.5 million in fees and other costs incurred in the case.

Earlier this month, the SEC moved to dismiss the case against DEBT Box without prejudice. Shelby has yet to rule on that motion.

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