In June 2014, the Securities and Exchange Commission charged an Albany, N.Y.-based hedge fund advisory firm, Paradigm Capital Management, with engaging in prohibited principal transactions and then retaliating against the employee who reported the trading activity to the Commission. It was the first time the SEC filed a case under its new authority to bring anti-retaliation enforcement actions.
On Tuesday, the SEC announced that the whistleblower will receive a maximum whistleblower award payment of 30 percent of the amounts collected from that enforcement action. He will receive more than $600,000 for providing “key, original information” and “suffering unique hardships” after management at the firm learned the misconduct was reported.
Last year, Paradigm Capital Management and owner Candace King Weir agreed to pay $2.2 million to settle the charges against them. 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 it 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 the employee from his head trader position, tasked him with investigating the very conduct he reported to the SEC, changed his job function to full-time compliance assistant, stripped him of his supervisory responsibilities, and “otherwise marginalized him,” the order says.
To date, the SEC has awarded 17 whistleblowers since its whistleblower program began more than three years ago. Payouts now total more than $50 million.