The Securities and Exchange Commission is seeking closure on a lawsuit against a crypto firm that’s put the regulatory agency in the unusual position of facing sanctions from a federal judge.
In a court filing on Tuesday, SEC attorneys asked Judge Robert Shelby of the Northern Division District Court of Utah to dismiss the agency’s lawsuit without prejudice, meaning the case could be retried, in order to avoid any potential disciplinary actions.
“While the Commission recognizes that its attorneys should have been more forthcoming with the Court, sanctions are not appropriate or necessary to address those issues,” the SEC lawyers wrote.
‘Undermined the integrity of the proceedings’
Under Chair Gary Gensler, the SEC has embarked on a campaign of enforcement actions against companies in the crypto industry, which Gensler has argued operates largely outside of compliance with U.S. securities law.
One lawsuit filed by the SEC over the summer alleged that a firm called DEBT Box had defrauded investors out of nearly $50 million by selling unregistered securities. As part of the action, the SEC successfully obtained a temporary restraining order and asset seizure to stop DEBT Box’s operations. SEC lawyers submitted an ex parte application, meaning the firm was not informed of the action and could not challenge it in court, with agency lawyers arguing that DEBT Box’s defendants were actively trying to stymie SEC efforts.
But subsequent arguments by the defendants shed doubt on those accusations. The agency’s lawyers argued that the defendants had closed bank accounts and transferred operations overseas in response to the SEC’s investigation, and that they had shut down specific social media accounts to hide suspicious activity. Defendants provided evidence refuting these claims.
In response, Shelby ordered the agency to “show cause” for its actions, or prove its basis for the initial ex parte application, restraining order, and asset seizure. In his filing, Shelby expressed concern that the agency had made “materially false and misleading representations” to freeze millions of dollars belonging to the defendants and that its lawyers had “undermined the integrity of the proceedings.”
‘Enormous damage’
In a late December filing, lawyers for the SEC admitted to missteps in the case, promising to conduct mandatory training for staff members involved in the investigation.
While the case was being tried in a district court in Utah, SEC enforcement chief Gurbir Grewal wrote to Shelby that he understood the ramifications of the agency’s actions. “I understand that the division fell short of these standards in this case, and I apologize for that shortfall,” he wrote in the filing.
The agency sought to avoid any sanctions, arguing that the training would suffice and that its lawyers had not engaged in “bad faith conduct.” It admitted that lawyers had made errors in presenting evidence and that it did not have proof of overseas transfers, instead making an inference based on a YouTube video from one of the defendants.
In a subsequent filing, the DEBT Box defendants pushed back on the SEC’s muted mea culpa, arguing that the agency “knew that it lied” and caused “enormous damage” by suppressing evidence. They sought to dismiss the case with prejudice and asked the judge to order the SEC to pay the defendants’ fees and costs incurred for the temporary restraining order and asset freeze.
The SEC’s filing on Tuesday does not meet the defendants’ demands. While the agency agreed to dismiss the case, by doing so without prejudice, it could bring the charges again at a later date. SEC lawyers argued that dismissal with prejudice is only appropriate in cases of “willful misconduct,” citing previous case law, which they say did not happen here. The lawyers also argued against granting the defendants’ request for repayment.
A spokesperson for the SEC said that the agency had no comment beyond the public filing.
This story was originally featured on Fortune.com