SEC Brings New Kind of Enforcement Action Aimed at Preventing Retaliation Against Whistleblowers
On June 16, 2014, the U.S. Securities and Exchange Commission (SEC) instituted an administrative proceeding against Paradigm Capital Management, Inc. (Paradigm) and its majority owner, Candace King Weir (Weir), in part for retaliation against a whistleblower for informing the agency about alleged improper principal transactions between the firm and an affiliated broker-dealer.1 The SEC alleged that Paradigm and Weir punished the whistleblower, who was formerly the head trader at the firm, for tipping the SEC about the allegedly improper trades by stripping him of his title and authority until he eventually resigned. Paradigm agreed to settle the charges related to the alleged retaliation and trading violations for $2.2 million in sanctions.
The SEC alleged that Weir caused dozens of improper principal transactions to occur between Paradigm and Weir's affiliated broker-dealer, C.L. King & Associates, Inc. The affiliated nature of the transactions was not disclosed to the hedge fund client on whose behalf the trades were entered. The SEC alleged that such transactions constitute a conflict of interest and should have been executed only with the client's informed consent. Although Paradigm established a review committee to approve the pricing of the trades at issue, the SEC alleged the committee was conflicted based on Weir's supervisory authority over its members. After learning that the whistleblower had contacted the SEC regarding the transactions, the SEC alleged that Paradigm immediately retaliated by removing the whistleblower from his position, stripping him of his supervisory responsibilities and otherwise marginalizing his role at the firm.
The SEC indicated this first-of-its-kind action should serve as a warning to firms not to retaliate against whistleblowers who tip the SEC about possible illegal activity. Andrew Ceresney, director of the SEC's Enforcement Division, emphasized that "those who might consider punishing whistleblowers should realize that such retaliation, in any form, is unacceptable." Sean McKessy, chief of the SEC's Office of the Whistleblower, echoed this sentiment, noting that the SEC "will continue to exercise [its] 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." The Paradigm whistleblower may be eligible for a whistleblower award under the Dodd-Frank anti-retaliation provisions, which can range between 10 percent and 30 percent of the SEC's recovery when the tip leads to sanctions of $1 million or more.
1 In the Matter of Paradigm Capital Management, Inc. and Candace King Weir, Adm. Proc. No. 3-15930.