Two SEC Lawyers Resign Amidst Judicial Rebuke

Two attorneys at the Securities and Exchange Commission (SEC), Michael Welsh and Joseph Watkins, have quit after a federal judge sanctioned them and severely criticized the regulatory agency's handling of a crypto-related case.

Earlier, a legal unit of SEC, represented by attorney Michael Welsh, had convinced the court to freeze assets of DEBT Box, arguing that the company was moving to Dubai, beyond US regulatory reach.

According to the people briefed on the matter, Welsh and Watkins resigned after an official from the Securities and Exchange Commission told them the official would fire them if they did not resign. The two attorneys were leading the case of the SEC versus Digital Licensing Inc., DEBT Box, the crypto platform. The federal district court judge in Salt Lake City overseeing the case, Robert Shelby, said the lawsuit against DEBT Box appeared to be clouded by allegations of false statements, misrepresentations, and a lack of evidence.

In March, Shelby gave his imprimatur to the SEC for what he characterized as "gross abuse" of power, even going so far as to extract an apology from the head of enforcement. By July 2023, the SEC had sued DEBT Box and its top management for fraud in connection to investors amounting to a minimum of $50 million. This, in turn, followed a court order towards the freezing of the company's assets and the appointment of a receiver by the end of the previous month.

The judge, however, lifted the freeze on the assets after Shelby disclosed some potentially false and misleading representations by the SEC. Following the ruling, the SEC was directed to cover some of the attorney's fees for DEBT Box. Judge Shelby was critical of the arguments of Welsh and the evidence that Watkins and his team gave. One such instance of such an assertion by the court is when Welsh said that DEBT Box was closing bank accounts and moving money overseas. This assertion was proved wrong.

This, the SEC attributed to a miscommunication, and was an error for which Welsh had apologized to the court.

The DEBT Box case then took an unexpected turn of events. In its latest filing, the defendants in the case contested the allegations by the regulator, saying they had misstated facts to obtain a temporary restraining order freezing the assets of the crypto platform.

SEC called the action "by Judge Robert Shelby." SEC lawyers, in the meantime, admitted to the court that in their approach, they indeed made some mistakes, but they asked the judge not to impose formal sanctions. In January, the SEC completely backed down from the lawsuit under mounting criticism. But Judge Shelby would not dismiss the case "without prejudice," which would have forbidden the SEC from bringing it again at a later date.

"DEBT Box" SEC case criticized by Judge Shelby

In the latter full month of his life, Judge Shelby issued a "show cause order" to the Securities and Exchange Commission (SEC)—a court directive compelling the agency to prove or justify its actions. Admittedly, the SEC lacked transparency in the matter but defended that there was no scope for filing a formal sanction case.

Judge Shelby, in his specific criticism, condemned the role of SEC attorney Michael Welsh, who had misled the court in trying to cover up facts. "Welish had to know that the statement from the TRO hearing was not accurate. But instead of correcting that misstatement, he and the commission subtly shifted the language in order to gloss over and perpetrate the misconduct.". In his statement responding to the court's scrutiny, SEC enforcement chief Gurbir Grewal lamented for the department and announced that steps are going to be taken to rectify the situation by hiring new attorneys in all locations and also making it compulsory for the enforcement staff to go for training. It has then filed for motions to recoup its legal fees and other expenses from the SEC amounting to more than $1.5 million sustained for the proceedings.