U.S. District Judge Robert J. Shelby, serving in the District Court of Utah, issued an order on 30 November 2023, raising the possibility of sanctions against SEC attorneys. These potential sanctions stem from making “misleading” claims about Debt Box, a crypto firm, allegedly moving assets and investor funds overseas, resulting in a court-ordered freeze of the company’s bank accounts.

Judge Shelby wrote the following in the “order to show cause”:

“After carefully reviewing the Commission’s filings and statements at the ex parte TRO hearing, the court is concerned the Commission made materially false and misleading representations that violated Rule 11(b) and undermined the integrity of the proceedings. The context is crucial—the representations were made by a federal agency seeking an ex parte TRO and while later seeking to preserve the TRO.“

An “Order to Show Cause” is a court order that requires a party to appear before the court and explain, or “show cause,” why a certain course of action should not be taken. It is commonly used in situations where the court needs more information before deciding on a particular issue or to ensure that a party justifies their actions or inactions regarding a matter at hand.

In law, a TRO stands for “Temporary Restraining Order.” It is a type of court order issued to temporarily protect a person or entity from certain actions until a full hearing can be held. Typically, a TRO is used to prevent irreparable harm or maintain the status quo until the court can hear more detailed arguments in the case.

A TRO is often sought in urgent situations where waiting for a standard court process might result in significant damage or injustice. For example, it might be used to stop the demolition of a building, the transfer of assets, or to prevent harassment or violence against a person.

The process to obtain a TRO usually involves an application to the court, often accompanied by a sworn statement detailing the need for immediate protection. The court then decides whether the circumstances warrant the issuance of the order. A TRO is typically granted without notice to the opposing party (ex parte), but it is temporary and only lasts until a full hearing can be conducted, where both parties can present their cases. After this hearing, the court may decide to extend the order into a preliminary injunction, which lasts for a longer period, or it may dissolve the TRO if it finds that there is no longer a need for it.

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In civil law, a sanction refers to a penalty or other type of enforcement used to provide relief for a wrong or to ensure compliance with the law. Sanctions are typically imposed by a court and can take various forms, depending on the nature of the legal issue and the jurisdiction.

Debt Box faced a temporary restraining order in August, limiting access to its assets. However, the order was dissolved after Debt Box showed no transfer of funds outside the U.S. or bank account closures before a hearing on the SEC’s request to freeze its funds, as per the company’s legal team.

The SEC sued Debt Box in July, alleging the firm deceived investors out of about $50 million through the sale of unregistered securities, termed “node licenses,” starting in 2021. The SEC claimed these licenses were falsely presented as tools for mining increasingly valuable cryptocurrency, whereas they were actually creating crypto through computer code.

Judge Shelby’s recent decision brought to light discrepancies in the SEC’s case. Initially, the SEC convinced the court to freeze DEBT Box’s assets, arguing the company was relocating to Dubai, out of U.S. jurisdiction. This claim was later disproved, as no bank account closures occurred, and an alleged overseas transfer of $720,000 was actually domestic.

While a TRM Labs report supports the SEC’s central allegation of Debt Box deceiving investors about token mining, the defense counsel has yet to comment. The SEC, acknowledging the order, is set to respond within Shelby’s two-week deadline.

Ripple’s CTO, David Schwartz, reacted strongly to the developments, criticizing the SEC’s actions in seeking the emergency order as “absolutely shocking behavior.” He accused the SEC of grossly misrepresenting facts to secure the order preemptively.

I’ve just read over the documents in the Debt Box case and this is absolutely shocking behavior. The SEC went to a judge seeking an emergency order to paralyze several businesses and blatantly misrepresented facts to get it before anyone on the other side could defend themselves.

— David “JoelKatz” Schwartz (@JoelKatz) December 5, 2023

Ripple’s legal team, including lawyer John E. Deaton and chief legal officer Stuart Alderoty, has also criticized the SEC’s approach in crypto cases. Deaton suggests issuing a subpoena against the SEC, and Alderoty has pointed out troubling patterns in the SEC’s conduct.

Any person surprised a federal judge is considering sanctions against the SEC for lying to the Court, in a case involving crypto, has not been paying attention during the last 3 years.

It appears the Lawyers at the SEC have made it personal when it comes to crypto cases. SEC… https://t.co/1rjLjiTvF3

— John E Deaton (@JohnEDeaton1) December 2, 2023

A troubling pattern emerges:
– Court finds the SEC demonstrated “hypocrisy” by making inconsistent arguments to the Court and not acting out of a “faithful allegiance to the law.” SEC v Ripple, 7/12/22
– Court agrees that the SEC defaulted on its duty to respond in good faith to…

— Stuart Alderoty (@s_alderoty) December 1, 2023

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• Source: https://www.cryptoglobe.com/latest/2023/12/ripple-cto-david-schwartz-on-the-absolutely-shocking-behavior-of-the-sec/