SEC Lawyers Resign Following ‘Gross Abuse of Power’ Sanction in Crypto Case

April 23, 2024

Following a scathing rebuke from a federal judge for what was deemed a “gross abuse of power” in a high-profile crypto case, two U.S. Securities and Exchange Commission (SEC) lawyers have tendered their resignations.

This comes amid heightened scrutiny and criticism directed at the Wall Street regulator, highlighting the profound impact of the judicial sanction on key figures within the SEC’s legal team.

Two lead attorneys in the controversial case against the Digital Licensing Inc. (DEBT Box) case,  Michael Welsh and Joseph Watkins, resigned from their posts in April after the SEC informed them of a potential termination if they stayed, Bloomberg reported, citing “people familiar with the matter” as the source of information.

According to information obtained from their LinkedIn profiles, Michael Welsh and Joseph Watkins each had approximately one and a half years of experience at the SEC before their resignation. Prior to their roles at the SEC, Welsh was affiliated with @CooleyLLP, while Watkins had ties to Parsons Behle & Latimer. Of particular interest is Welsh’s involvement during his tenure at Cooley, where he contributed to legal representation efforts involving the crypto company Kik in its 2019 lawsuit brought by the SEC under Chairman Clayton’s leadership.

During the legal proceedings, the judge criticized arguments presented by Welsh, who served as the SEC’s lead trial attorney, along with evidence provided by Watkins and his team. One notable incident involved Welsh informing the judge that DEBT Box, headquartered in Draper, Utah, was closing bank accounts and transferring assets overseas. However, the court discovered that this action was not taking place. Following this discrepancy, an SEC investigator acknowledged that a miscommunication had occurred, leading to the error in Welsh’s statement. Subsequently, Welsh issued an apology to the court for the misunderstanding.

In mid-March, Federal District Court Judge Robert Shelby of Salt Lake City made an unprecedented decision to sanction the SEC, citing the regulator’s abuse of authority in its case against DEBT Box. The judge emphasized that the regulator’s actions amounted to a “gross abuse of power” entrusted by Congress, significantly undermining the integrity of the legal proceedings and the overall judicial process. This critical assessment was detailed in an extensive 80-page legal filing issued by Judge Shelby on Monday.

Kimberly Erle, a former SEC Associate Chief Accountant of the Division of Economic and Risk Analysis, Office of Structured Disclosure, noted that the resignation of two lawyers who had just completed their federal probationary terms, are “sacrificial lambs.” Meanwhile, their managers will just have to undertake online courses on “supervision to prevent misconduct.”

Crypto lawyer James Murphy echoed her opinion noting that while two SEC lawyers were pressured to resign in connection to the DEBTbox case, the court’s findings indicated that the misconduct wasn’t limited to just these individuals. Instead, there was a broader pattern of organizational misconduct that implicated the SEC as a whole. He criticized the notion of scapegoating a few individuals as a substitute for genuine accountability when the issue permeates the entire organization.

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