The Securities and Exchange Commission (SEC) has settled its first whistleblower retaliation case since financial reforms introduced under the 2010 Dodd-Frank Act strengthened whistleblower protections.
According to the SEC’s Office of the Whistleblower, Paradigm Capital Management, an Albany, N.Y.-based hedge fund advisory firm, and its owner Candace King Weir “engaged in prohibited principal transactions and then retaliated against the employee who reported the trading activity to the SEC.” Ms. Weir and her firm agreed to pay $2.2 million to resolve the charges.
The whistleblower alleged that Ms. Weir conducted transactions between Paradigm and a broker-dealer that she also owns while trading on behalf of a hedge fund client.
“Such principal transactions pose conflicts between the interests of the adviser and the client, and therefore advisers are required to disclose that they are participating on both sides of the trade and must obtain the client’s consent,” the SEC said in a statement. “Paradigm 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.”
A Commission rule adopted in 2011 under the Dodd-Frank Act authorized the SEC to bring enforcement actions against companies and individuals for retaliating against whistleblowers who report violations of securities laws.
The SEC said that after Paradigm found out that its head trader had reported the company’s misconduct to federal regulators, it “engaged in a series of retaliatory actions that ultimately resulted in the head trader’s resignation.”
“Paradigm retaliated against an employee who reported potentially illegal activity to the SEC,” said Andrew J. Ceresney, director of the SEC’s Enforcement Division. “Those who might consider punishing whistleblowers should realize that such retaliation, in any form, is unacceptable.”
“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,” said Sean McKessy, head of the SEC’s Office of the Whistleblower. “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.”