Judge Rules Against SEC, Citing ‘Gross Abuse of Power’ in Digital Licensing Lawsuit

The Securities and Exchange Commission has again secured a loss in one of its many lawsuits. Bringing a dramatic end to the lawsuit involving Digital Licensing Inc. and other defendants, the U.S. District Court for the District of Utah has passed sanctions against the plaintiff, the Securities and Exchange Commission. 

The ruling highlights significant misconduct by the SEC during the proceedings, leading to a stern rebuke from the court.

Court Ruling Unveils SEC’s Misconduct

The Securities and Exchange Commission found itself in hot water after a federal court uncovered a series of missteps in its handling of a case against Digital Licensing Inc. and associated parties. On 18th March 2024, the court held that it “rejects the SEC’s motion to dismiss the case without prejudice, citing failure to comply with procedural requirements.”

The legal battle began on July 26, 2023, when the SEC filed a sealed complaint and an ex parte application for a temporary restraining order (TRO) against Digital Licensing Inc. and others. The SEC initially won with the court granting the TRO against the defendants, thereby freezing assets and appointing a receiver for the liquidation of the same. 

However, when the defendants moved to dissolve the TRO, it led to the hearing of their grievances in September 2023, due to the passing of the ex-parte decree. During the hearing, the court granted the defendants’ motions to dissolve the TRO, citing the SEC’s failure to demonstrate irreparable harm. As a result, “The court dissolved the TRO and determined the Receivership should not continue beyond a transition period.”

Sanctions Imposed

The court’s decision turned the tables. The federal court imposed sanctions on the SEC, by exercising “its inherent authority to sanction the Commission’s bad faith conduct.” 

The order passed by Judge Robert T. J. Shelby directed the SEC to pay attorneys’ fees and legal costs incurred by the defendants as well as the cost of the court-appointed receiver. 

In response to the sanctions imposed by the Court, the SEC acknowledged the various missteps by its attorneys but argued against sanctions. The Commission vehemently argued that there was no intent to mislead and that it had sovereign immunity. 

However, the court disagreed. The court found the SEC guilty of gross abuse of power, as characterised by repeated misrepresentations and deliberate falsehoods. 

The court held, “The ruling sends a clear message that no entity, regardless of its stature, is above the law.”

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