InfoBytes Blog
District Court finds SEC acted in bad faith and orders it to pay defendant’s attorney fees partially
On March 18, the U.S. District Court in Utah ordered the SEC to pay a defendant’s attorney fees and legal costs partially after the Commission was found to have engaged in “gross abuse” and acted in bad faith on how it presented evidence as part of a temporary restraining order (TRO). Additionally, the court denied the SEC’s motion to dismiss the case without prejudice.
The SEC had filed suit against the defendant, a cryptocurrency company, for allegedly making false and misleading statements to investors, specifically how the company wished to move its assets to the United Arab Emirates in an online video to purportedly “evade law enforcement.” The court had agreed with the SEC and eventually froze the defendant’s assets. In reply, the defendants contended the SEC’s representations were “highly misleading” as they were in response to a viewer’s question posed in a comment as weighing the benefits of operating in the UAE compared to a U.S. regulatory environment. Despite the SEC “affirmatively and repeatedly” asserting that the defendants were moving funds and assets overseas, the court found no evidence to support that claim and had decided to grant the SEC a TRO because of these misrepresentations.
The court emphasized that it does not take its authority to issue TROs lightly, since this authority invokes extreme powers of the federal judiciary. The court now found the SEC made false statements, and despite having multiple opportunities to correct them, proceeded to make additional “layers of false statements” demonstrating “subjective bad faith.”
The court refused to write these issues off as mistakes. In its reply, the SEC stated that its attorneys made inaccurate statements, failed to correct them, and improperly labeled an inference as fact. The court acknowledged that the SEC’s attorneys “fell short” of the responsibility entrusted to it by Congress. On reply, the Commission “deeply regrets” its errors but argued it does not deserve any sanctions since it had not engaged in any “bad faith conduct.” The court disagreed, noting “companies were seized, assets were frozen, and lives were upended.”
Further, the SEC argued that sovereign immunity barred it from any monetary sanctions; the court disagreed. The court admonished the SEC: “[W]hen an attorney makes a false statement of material fact to a court, the lawyer is required to correct it.” The court found the SEC’s explanations unsatisfactory. It also denied the SEC’s motion to dismiss without prejudice. The court sided with the defendants eventually after they asserted the SEC sought to “evade” the court’s oversight. While weighing the decision to impose a greater sanction, the court decided against imposing fees and costs for the entire court case, but directed the Defendants to submit a fee request, if they would like. In all, the court found with “clear evidence” there was a “complete lack of color and an improper purpose on the part of the government.”