Crypto Suit Uses Texas Legal Strategy to Dial Up Attack on SEC

A suit brought by a leading crypto trading platform seeking to preempt enforcement activity by Wall Street’s top cops shows how much the industry is leaning on courts in the Lone Star State to fight US oversight.

Crypto.com’s suit against the SEC, filed this month in Texas federal district court, represents an escalation in the industry’s battle to rein in how the agency polices digital assets.

“In response to what some have called the SEC’s war on crypto, some market participants have strategically filed suits against the SEC in jurisdictions that are considered to be more receptive to claims of regulatory overreach,” said Helen Gugel, a litigation and enforcement partner at Ropes & Gray LLP.

Crypto.com sued the SEC after receiving a Wells notice, which indicated the regulator’s plan to bring an enforcement action against the digital-asset exchange for operating as an unregistered broker-dealer and securities clearing agency.

The platform’s sweeping preemptive suit—with broad implications for secondary trading of digital assets in the US—alleges the SEC has expanded its jurisdiction beyond its statutory limits and established an unlawful “de facto” rule that crypto trades are securities transactions, no matter how they are sold.

The Crypto.com suit uses a legal strategy of affirmative litigation against the agency, well-honed by financial companies, conservative groups, and others challenging the Biden administration.

The Singapore-based platform this year moved its US headquarters to Tyler, Texas, allowing it to file suit under the jurisdiction of the US Court of Appeals for the Fifth Circuit, which has struck down a slew of Biden regulations. It also deployed former US Solicitor General Noel Francisco, now with Jones Day, among the attorneys filing its suit, likely signaling the company’s ambitions to advance the case to the Supreme Court if needed.

The Fifth Circuit could provide a haven for digital-asset companies that anticipate SEC enforcement actions cropping up elsewhere, like within the New York-based Second Circuit where the agency brings many cases.

Planting a flag in Texas by basing a company’s operations there and initiating litigation against the agency could help crypto firms argue for a strategic transfer of enforcement actions to the state’s conservative-leaning federal courts, according to Todd Phillips, assistant professor of legal studies at Georgia State University’s Robinson College of Business and a former federal financial regulatory attorney.

The SEC declined to comment.

Home Court Advantage

The SEC under Chair Gary Gensler has taken an aggressive stance on crypto, treating most digital assets as securities under its oversight. It’s also filed at least six enforcement actions against secondary-market crypto platforms, according to the Crypto.com suit.

The suit builds on previous cases filed in Texas federal courts challenging SEC actions, including a pending case brought by crypto startup Lejilex and the Crypto Freedom Alliance of Texas in February proactively seeking a court order that secondary-market sales of digital assets aren’t within the SEC’s purview.

Crypto.com and other industry players have made similar efforts to get their cases before Texas courts viewed as business-friendly.

“The SEC would make the claim that Crypto.com customers are everywhere in the United States, and so it could feasibly file a lawsuit in an SEC-friendly jurisdiction,” Phillips said. “Crypto.com clearly doesn’t want that to happen. It’s headquartered in Texas for a very specific reason, which is hoping to get Fifth Circuit jurisdiction.”

A Texas federal judge in September dismissed a case brought by crypto company Consensys Software Inc., finding that a Wells notice and subsequent suit from the SEC weren’t final actions and that the case was therefore premature.

But a ruling by a district or appellate court in favor of Crypto.com responding to a similar Wells notice from the SEC, and seeking a preemptive declaratory judgment on the agency’s power to policy secondary trading in digital assets, could have a major impact on how the industry broadly is overseen by regulators in Washington.

“If the strategy is successful, it could create a circuit split down the road that makes it more likely the Supreme Court will weigh in,” Gugel said.

Justices, Take Note

The Fifth Circuit jurisdiction where Crypto.com and other industry players brought their suits has been a breeding ground for hot-button Supreme Court cases restricting agency powers, including the Jarkesy v. SEC decision this year limiting the SEC’s ability to use its in-house judges in enforcement proceedings seeking civil penalties.

Crypto companies say they’re seeking similar judicial clarity from higher courts on the SEC’s authority over their industry.

“U.S. Courts have provided the crypto industry much-needed relief from the SEC’s enforcement by regulation overreach by confirming what we’ve known all along—that crypto is not itself a security,” said Nick Lundgren, chief legal officer at Crypto.com. “These rulings against the SEC put us on strong legal footing to prevail in our suit. We trust the U.S. Judicial Branch will ultimately provide the regulatory certainty the SEC has failed to deliver.”

The Crypto.com case is assigned to Judge Jeremy Kernodle in the US District Court for the Eastern District of Texas, who ruled in July to freeze rulemaking by the Labor Department, citing the high court’s decision in Loper Bright Enterprises v. Raimondo overturning the Chevron doctrine that courts had used to defer to reasonable agency interpretations of ambiguous statutes or unclear laws.

If any of the crypto industry challenges to the SEC pending in Texas federal district courts result in a circuit split and land in the Supreme Court as a petition, the justices could apply both Jarkesy and Loper Bright to curtail the SEC’s crypto enforcement agenda.

“They’re definitely hoping that the Supreme Court is going to reject the SEC’s whole theory of the case,” Phillips said.

Jones Day and Potter Minton represent Crypto.com.

The case is Foris DAX Inc. v. SEC, E.D. Tex., No. 6:24-cv-00373, complaint 10/8/24.