The US Securities and Exchange Commission exercised recently-granted powers that allow it to punish investment advisers for retaliating against employees that blow the whistle on bad behavior.
The commission charged NY-based hedge fund Paradigm Capital Management with “engaging in prohibited principal transactions” and then retaliating against the employee who reported the trading activity to the SEC, according to a SEC complaint.
Paradigm and owner Candace King Weir agreed to pay $2.2 million to settle the charges.
A commission rule adopted in 2011 under the Dodd-Frank Act, authorized the SEC to bring enforcement actions based on evidence of retaliation against whistleblowers who report potential securities law violations. The Paradigm case marks the first time the SEC exercised this new power, and it could be considered a warning shot to other registered advisors.
From the establishment of the whistleblower program in August 2011 until the end of the commission’s fiscal year 2013, the SEC received 6,573 tips and complaints from whistleblowers.
“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, chief 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.”
According to the SEC’s complaint, Weir conducted trades between Paradigm and a broker-dealer under her control, that presented a conflict of interest never disclosed to investors. That activity was reported to the SEC by Paradigm’s lead trader. After learning that the wrongdoing had been reported, Paradigm “immediately engaged in a series of retaliatory actions” against the individual, stripping him of his title and supervisory responsibilities.
Both Paradigm Capital and Weir neither admitted nor denied guilt in the matter.