July 11, 2014 — A New York hedge fund advisory firm has been charged by the Securities and Exchange Commission (SEC) with conducting forbidden principal transactions and then engaging in retaliatory actions against the employee who reported the misconduct. This is the first anti-retaliation enforcement action brought by the SEC under the authority given the agency under a 2011 rule authorized by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. Under the Dodd-Frank whistleblower program, rewards are available for informants who provide original, high-quality information that leads to an SEC enforcement action resulting in sanctions that top $1 million. The awards range from 10 to 30 percent of the amount the SEC collects.
Whistleblower Notified SEC Of Employer’s Securities Law Violations, And Employer Retaliated
From 2009 to 2011, Candace King Weir, the owner of advisory firm Paradigm Capital Management, engaged in transactions on behalf of Paradigm with C.L. King & Associates, a broker-dealer that Weir also owns. At the same time, Paradigm also made trades on behalf of PCM Partners L.P. II, one of Paradigm’s hedge fund clients, which was negatively affected by the Paradigm-King transactions. Precisely because these sorts of principal transactions give rise to conflicts of interests between the adviser and the client, advisers must disclose their participation on both sides of the trades and acquire their client’s consent in advance of each principal transaction. But Paradigm did neither.
In a whistleblower submission to the SEC, Paradigm’s former head trader notified the SEC that Paradigm had taken part in prohibited principal transactions with the affiliated broker-dealer King while the firm was trading on behalf of its client, PCM Partners. In response, Paradigm immediately began to retaliate, first removing the head trader from that position and demoting him to serve as a full-time compliance assistant. The employee was relieved of all supervisory responsibilities and marginalized from the company in a variety of other ways.
Such misconduct has been condemned by the SEC’s chief of the 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.”
Paradigm and Weir have consented to settle the charges against them by paying disgorgement of $1.7 million, which amount will be distributed to former and current investors in the hedge fund. The two will also pay $181,771 in prejudgment interest and a $300,000 penalty.
SEC Whistleblowers Deserve Protection From Retaliation
SEC investigators cannot possibly identify every violation of the securities laws. The government relies on first-hand information from inside employees. Those insiders need and deserve protection when they come forward to collaborate with the government. While Waters & Kraus did not handle this particular case, we are handling similar cases. If you have similar claims against a different hedge fund adviser or financial firms, contact us or call 855.784.0268.The qui tam attorneys with Waters & Kraus, like Paul Lawrence in the Washington D.C. area office, are committed to safeguarding whistleblowers willing to do the right thing.
Contact us by email or call us at 855.784.0268 to learn how we can work together to notify the SEC about securities law violations.