Two lawyers for the United States Securities and Exchange Commission (SEC) have reportedly resigned after a district court sanctioned the agency for “gross abuse” of power and acting in “bad faith” in a crypto case. 

According to an April 22 Bloomberg report, Michael Welsh and Joseph Watkins, lead attorneys in the case against crypto platform DEBT Box, resigned earlier this month. Sources familiar with the matter say the lawyers were warned they would be terminated if they stayed.

The lawyers were both relatively new to the agency, as indicated by their LinkedIn profiles. Welsh served as a trial attorney at the SEC from December 2022, while Watkins acted as an attorney at the Division of Enforcement beginning in January 2023.

The pair’s resignation follows a court decision from Chief Judge Robert J. Shelby, the federal judge hearing the case in Salt Lake City, Utah. In March, Judge Shelby sanctioned the SEC for false statements and misrepresentations in its case against Digital Licensing Inc., known as DEBT Box.

Judge Shelby said in the March 18 filing that “the Commission’s above-discussed conduct constitutes a gross abuse of the power entrusted to it by Congress and substantially undermined the integrity of these proceedings and the judicial process.”

In August 2023, the SEC obtained an emergency relief to halt the Utah-based company, temporarily freezing its assets and obtaining restraining orders against DEBT Box’s principals under claims of a $50-million crypto fraud scheme.

Judge Shelby further stated that the evidence put forward “lacked any basis” but was nonetheless presented in “deliberately false and misleading ways.”

“Welsh knew his statement from the TRO hearing was incorrect. Rather than correcting the misstatement, he and the Commission attempted to subtly shift the language to gloss over and perpetuate the misconduct.”

The crypto industry has been vocal in its criticisms of the SEC’s approach under Chair Gary Gensler, particularly concerning the agency’s “regulation by enforcement” strategy. Some critics argue that this approach has increased regulatory uncertainty in the industry, stifling innovation and undermining U.S. competitiveness in the digital asset space.

High-profile enforcement actions against crypto platforms include lawsuits against crypto exchanges Coinbase and Binance, and the agency’s forthcoming action over the decentralized finance platform Uniswap.

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