SEC Brings First Whistleblower Anti-Retaliation Enforcement Action

Author: Marta Moakley, XpertHR Legal Editor

June 18, 2014

The Securities and Exchange Commission (SEC) has settled the first case brought under its new authority to bring anti-retaliation enforcement actions against a NY-based hedge fund advisory firm. The firm's owner was also charged with conducting conflicted transactions. This is the first enforcement action under a rule adopted in 2011 under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank), which authorized enforcement actions based on retaliation against whistleblowers who report potential illegal activity to the SEC.

Paradigm Capital Management and its owner, Candace King Weir, agreed to pay $2.2 million to settle the administrative charges. Weir was the principal for both Paradigm and a second corporation, broker-dealer firm C.L. King & Associates, Inc., but neither Paradigm nor Weir disclosed the relationship to a hedge fund client affected by transactions involving the two corporations. Because these transactions were conflicted, they required specific written disclosure and consent requirements that were not met.

Paradigm's former head trader made a whistleblower report to the SEC that revealed the nature of the conflicted transactions. The whistleblower notified Weir and a C.L. King executive that he had reported certain potential securities violations to the SEC. The employee was then removed as head trader, displaced from the trading floor entirely and otherwise marginalized in the workplace. The whistleblower resigned shortly thereafter.

The SEC order detailing the settlement explained the conflicted transactions that had been reported by the whistleblower to the SEC. In addition to the monetary payout (which includes payments to the hedge fund investors, prejudgment interest and a penalty), the administrative proceedings concluded with a cease and desist order regarding the violations. Paradigm and Weir will also retain an independent compliance consultant.

In an SEC press release, Andrew J. Ceresney, director of the SEC Enforcement Division stated, "Paradigm retaliated against an employee who reported potentially illegal activity to the SEC. Those who might consider punishing whistleblowers should realize that such retaliation, in any form, is unacceptable."

Whistleblower cases are not only being brought in administrative proceedings, but also continue to move through the courts. The reach of the underlying statutory authority for this rule, the Dodd-Frank Act, continues to be debated in the courts. In addition, the Supreme Court recently expanded the whistleblower protection provisions of the Sarbanes-Oxley Act to include employees, contractors and subcontractors of public companies.