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SEC Brings First Whistleblower Retaliation Enforcement Action

Joe Mont | June 16, 2014

With the first case under its new authority to bring anti-retaliation enforcement actions, the Securities and Exchange Commission on Monday charged an Albany, N.Y.-based hedge fund advisory firm with engaging in prohibited transactions and then seeking retribution against the employee who reported the illicit trading activity.

Paradigm Capital Management and owner Candace King Weir agreed to pay $2.2 million to settle the charges. According to the SEC's order instituting a settled administrative proceeding, Weir conducted transactions between Paradigm and a broker-dealer that she also owns while trading on behalf of a hedge fund client. Advisers are required to disclose that they are participating on both sides of the trade and must obtain the client's consent.  Paradigm also failed to provide effective written disclosure to the hedge fund and did not obtain its consent as required prior to the completion of each principal transaction. The SEC's order adds that Paradigm's Form ADV was materially misleading because it failed to disclose the CFO's conflict as a member of the conflicts committee.

An SEC rule adopted in 2011 under the Dodd-Frank Act authorized the SEC to bring enforcement actions in cases where there is retaliation against whistleblowers who report potential securities law violations.  The SEC's order finds that after Paradigm learned that the firm's head trader had reported potential misconduct to the SEC, it engaged in a series of retaliatory actions that ultimately resulted in his resignation. Paradigm removed him from his head trader position, tasked him with investigating the very conduct he reported to the SEC, changed his job function from head trader to a full-time compliance assistant, stripped him of his supervisory responsibilities, and “otherwise marginalized him.,” the order says.

“For whistleblowers to come forward, they must feel assured that they're protected from retaliation and the law is on their side should it occur,” Sean McKessy, chief of the SEC's Office of the Whistleblower, said in a statement.  “We will continue to exercise our anti-retaliation authority in these and other types of situations where a whistleblower is wrongfully targeted for doing the right thing and reporting a possible securities law violation.”

Paradigm and Weir agreed to jointly and severally pay disgorgement of $1.7 million for distribution to current and former investors in the hedge fund, and pay prejudgment interest of $181,771 and a penalty of $300,000. Paradigm also agreed to retain an independent compliance consultant.