SEC Attorneys, Even in a Pinch, Must Avoid Misstatements in Court

The first time I appeared in federal court as a lawyer for the Securities and Exchange Commission I thought to myself how different it would be. Since coming from private practice in commercial litigation, I was now wearing the proverbial white hat. I was right, but not in the way I expected. The judge took my head (and the hat) right off, testing everything I had to say and challenging every assertion.

Of course he did. I held all the cards and the deck was stacked. He needed to be sure I wasn’t cheating. I wasn’t, so we got along just fine.

When I was promoted to run my regional office trial unit, this lesson wasn’t wasted. As a seasoned litigator, it also wasn’t new. The whole process—including the endless friction in the trial proceedings—enhances the potential for getting to the truth or a fair approximation. My court appearances representing the SEC were always much the same as that first one.

And, just like that first judge I met as an SEC lawyer and every judge who followed, I followed suit as a manager. In each encounter with SEC colleagues—whether it was with my team managing a case, before or after filing, or with an investigating lawyer working on a case to be instituted or filed in court—my questions sought to test the evidence. It may have been annoying, but I needed to see if our case held up to tough scrutiny, and to assess whether there were other sources that might corroborate our narrative—or tell a wholly different one.

This brings me to the recent debacle in the SEC’s case against Debt Box, where the district court sanctioned the SEC for its “bad faith conduct in obtaining, maintaining, and defending the TRO.” In July 2023, the SEC sued crypto platform Debt Box for allegedly defrauding investors of at least $49 million. The district court froze the company’s assets shortly thereafter at the SEC’s request. The court reversed itself when the SEC’s alleged misleading representations came to light.

In the aftermath, Enforcement Division Director Grubir Grewal admitted to the misrepresentations in a court filing and a group of Republican senators wrote to Chairman Gary Gensler with their concerns over the conduct and the effect on public confidence in US markets. This comes amid heightened attention as the SEC has brought actions against crypto companies, and high-stakes battles over whether cryptocurrency is a security are heating up.

The district court’s 80-page opinion imposing sanctions recounts SEC staff misstatements of fact, opportunities to correct that were not taken, and regrets. It is quite a read, but what’s most harrowing is the court’s clear understanding that it was misled.

To begin with, temporary restraining order or emergency action cases are different. The SEC files TROs ex parte—that is, without the other side involved—so the already-high standard government lawyers are held to should be even higher. The court is being asked to grant extraordinary relief based on the SEC’s say-so and without a response from the defendant. And courts grant this relief all the time. As they should.

The TRO is an important tool in preventing alleged fraudsters from dissipating assets or moving them out of the country. But the supporting evidence presented to the court must actually be true and correct to the best of the knowledge of the team. The team has to put in the work on the front end to make sure that is so.

In an SEC regional office, that means everyone from the investigating lawyers and their team, the trial lawyers, and every level of supervision, all the way up to the regional director of the office, are all asking the questions that my first SEC case judge asked—or should be.

Then the matter goes to the Enforcement Division leadership in Washington, D.C., and to other SEC offices and divisions that might have an interest in the matter, to evaluate further before final consideration by the Commission.

Somehow, in the Debt Box matter, were these basic questions not asked through all of this process? What information was offered at these various steps?

I have described Debt Box as a slow-rolling disaster. While I can see possibly getting the facts wrong given the speed required to file a TRO, the insult to the court and to the public trust was repeated—more than once—even after the defendant challenged them.

During a full investigation, there’s an opportunity for the subject of an investigation or counsel to review and discuss the facts with the SEC’s staff. Through that process, the SEC staff may reach a different view as to what has occurred, but if not, there is the Wells process, where the investigated party has an opportunity to respond to make their case both the SEC staff and to the Commission itself. The entire purpose is to get it right and to make sure that charges fit the violations, if any, and to do so through a respectful and thoughtful discussion of the facts.

In a TRO, that doesn’t happen. But as a TRO develops, and there is the ability to have a back-and-forth, the SEC staff can’t remain so myopic that it refuses to concede what is right in front of them just because a case already has been filed.

As someone who does this work every day and has for, uh, a long time, I can only hope that the Commission and the Division of Enforcement are taking a long hard look at what happened and that there will be a public statement or report. In this case, the judge said his order applies only to attorney conduct and doesn’t apply to the merits of the case, but the two are often intertwined.

Thus far, we have really heard only regrets. The enforcement division’s director promised the court that the division’s staff would receive training in the importance of their professional obligations as government lawyers and employees, and the “unique considerations” in play when seeking emergency relief, but that misses the mark.

My concern isn’t really with the line staff; it’s whether those staffers are willing to challenge the status quo when appropriate, and if their supervisors are willing to decline to bring a case that shouldn’t be brought, particularly when new facts come to light.

What’s really important here is that judges have to trust the SEC staff when they bring a TRO to their courts. Investors are depending on that, other law enforcement agencies are relying on that, and the SEC staff need that.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Amy Greer is partner and a member of the white collar defense and investigations practice group at K&L Gates.

Write for Us: Author Guidelines