First Circuit Nixes SEC’s Relief-Defendant Tactic in Crypto Case, Returns Gastauer’s Frozen Funds
SEC Loses Key Relief-Defendant Ruling in Crypto Case
The First Circuit just told the SEC it cannot freeze a German banker’s assets to claw back money from a fraud he never joined. In a swift reversal, the appeals court ripped the agency’s tactic of naming “relief defendants” who hold no legal claim to disputed funds, handing Raimund Gastauer his money back and clipping the SEC’s reach in crypto enforcement actions.
The trouble started when the SEC sued Roger Knox and a web of offshore companies for allegedly running an unregistered crypto exchange and Ponzi-like scheme that raised tens of millions from U.S. investors. Knox and his firms never showed up in court, so a default judgment handed the agency nearly $40 million in disgorgement. To collect, the SEC added Knox’s German uncle, Raimund Gastauer, as a “relief defendant,” claiming he received $1.27 million from the scheme and had no legitimate claim to it. Gastauer fought the label, arguing he was an arms-length investor who simply wired funds to Knox’s entities and later got repaid. The district court sided with the SEC, froze the money, and ordered Gastauer to hand it over.
Judges on appeal saw it differently. They ruled that relief-defendant status requires the SEC to show the recipient lacks any ownership interest or defense to the funds—not merely that the money came from a wrongdoer. Because Gastauer had a facially valid contract claim against the Knox entities, the court held, the agency could not treat him like a passive wallet. The panel vacated the disgorgement order against him and told the SEC to return the frozen assets.
In plain English, the First Circuit just narrowed the government’s shortcut for grabbing crypto-tainted money from third parties. The SEC can still sue actual fraudsters, but it can no longer assume that every downstream recipient is fair game without proving unjust enrichment.
For markets, the decision tilts power back toward exchanges, market makers, and liquidity providers who touch customer or protocol funds. It raises the bar the agency must clear before freezing wallets or bank accounts in enforcement sweeps, potentially slowing cases against DeFi mixers, OTC desks, and offshore stablecoin issuers. Traders and funds now have a stronger shield when they receive payments from counterparties later accused of fraud, lowering the risk that legitimate trading gains get clawed back years later.
The ruling signals that the SEC’s expansive use of relief defendants in crypto cases will face tougher scrutiny, forcing the agency to build stronger unjust-enrichment cases or risk watching its recovery targets slip away.
