SEC Attorneys Resign After Agency Sanctioned Over Debt Box Lawsuit

In a blow to the U.S. Securities and Exchange Commission (SEC)’s regulatory campaign against crypto, two of its lawyers resigned after being sanctioned by a federal judge last month.

According to an April 22 Bloomberg report citing “sources familiar with the case,” SEC lawyers Michael Welsh and Joseph Watkins were given the choice to resign or face dismissal. The ultimatum came after the agency was sanctioned by a federal judge over its lawsuit against Digital Licensing Inc., a Utah-based cryptocurrency company known as Debt Box.

Welsh served as a former lead attorney in the Debt Box case, while Watkins’ declaration served as the foundation for the proceedings. In March, Judge Robert Shelby of the Utah District described the SEC’s bid to obtain a temporary restraining order against Debt Box as a "gross abuse of power."

Court documents show that Welsh formally resigned on April 15. Watkins’ status is less clear, as his LinkedIn still lists his employment with the agency.

An SEC spokesperson declined to comment.

Court tosses Debt Box case

In August 2023, Judge Shelby issued asset freezes and restraining orders against Debt Box company principals at the behest of the SEC for allegedly orchestrating a cryptocurrency investment scheme that defrauded investors out of $50 million.

However, Shelby reversed the asset freeze in December after determining that the SEC made “materially false and misleading representations” in bringing the case against Debt Box.

However, Senate Republicans criticized the SEC in a letter to its Chairman, Gary Gensler, over the case in February, calling the agency's behavior "unethical and unprofessional" and questioning the SEC’s broader enforcement practices.

In March, Shelby sanctioned the SEC, ruling that it had “undermined the integrity of proceedings” and caused "irreparable harm” to Debt Box. Shelby also ordered the SEC to cover Debt Box’s legal costs.

Regulation by enforcement

Web3 industry leaders welcomed the sanctions, arguing that Gary Gensler's SEC has long waged an illegitimate campaign of regulation by enforcement against the crypto industry.

“The SEC's regulation by enforcement approach to crypto seems designed not to faithfully apply the law but rather to chill the industry and drive crypto founders out of the United States through fear and intimidation,” tweeted Jake Chervinsky, a board member for the DeFi Education Fund. “The SEC has taken big losses on a number of legal issues recently in the Ripple, Grayscale, and Coinbase cases, not to mention its thrashing in the Debt Box case.”

“The US will be picking up the pieces of the agency’s disastrous policies long after Gensler is gone,” said Brad Garlinghouse, the CEO of Ripple.

The SEC has frequently brought enforcement actions against crypto firms in recent years, including leading exchanges Coinbase and Binance last June. While Binance settled with the Department of Justice for $4.3 billion in November, Coinbase vowed to fight the SEC in court.

However, Coinbase brought its own legal complaint against the SEC last April, seeking that a co compel the SEC into responding to a rulemaking petition filed by the exchange in 2022. The petition requested that the SEC adhere to its formal rulemaking process to provide clear cryptocurrency regulations informed by public commentary.

The SEC rejected the petition in December, eliciting an appeal from Coinbase in March. “The SEC’s denial is arbitrary and capricious, an abuse of discretion, and a violation of the Administrative Procedures Act,” said Paul Grewal, Coinbase’s chief legal officer.

Two weeks ago, the SEC also issued a Wells Notice to Uniswap Labs, the team behind the Uniswap decentralized exchange. The issuance of a Wells Notice precedes the filing of a formal lawsuit against its recipient.