The Securities and Exchange Commission (SEC) announced that it has charged a hedge fund advisory firm for retaliating against an employee who reported illegal trading activity to the SEC. This charge represents the first time the SEC has filed a case under the authority of the Dodd-Frank Act to bring anti-retaliation enforcement actions.
According to the charges filed by the SEC, Paradigm Capital Management and its owner Candace King Weir conducted transactions between Paradigm and a broker-dealer that she also owned while trading on behalf of a hedge fund client. Paradigm and Weir failed to properly disclose the conflict of interest in such trades to clients and failed to obtain their consent. A Paradigm trader reported the activity to the SEC. When the whistleblower’s activities were discovered, Paradigm and Weir proceed to strip him of his title and authority and demoted him several times, until he finally quit the firm.
“Paradigm retaliated against an employee who reported potentially illegal activity to the SEC,” said Andrew Ceresney, Director of the SEC’s Enforcement Division. “Those who might consider punishing whistleblowers should realize that such retaliation, in any form, is unacceptable.”
Paradigm and Weir agreed to pay $2.2 million to settle the charges, with no admission of wrongdoing attached to the settlement. Under the terms of the settlement, 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.
It is unclear from information released by the SEC exactly what portion of the penalty was for trading violations and what portion was for the retaliation claim, thus leaving some ambiguity regarding how seriously the SEC is treating the whistleblower retaliation portion of the case. However, the mere fact that the SEC has chosen to utilize its anti-retaliation powers under Dodd-Frank should serve as a warning. As stated by Sean McKessy, Chief of the SEC’s Office of the Whistleblower, “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. 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.”