On June 16, 2014, the U.S. Securities and Exchange Commission (SEC) resolved its first whistleblower retaliation enforcement action. The SEC’s order against Paradigm Capital Management, Inc. is the first-ever enforcement action brought by the agency under the anti-retaliation provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Employers should take note of the order and prepare for similar enforcement actions by the SEC over the coming months and years.

The SEC’s order requires Paradigm Capital to pay over $2 million in fines for trading violations of the Investment Advisers Act of 1940 and for violations of the whistleblower protection provisions of the Securities Exchange Act of 1934. The anti-retaliation provisions, which were added in 2010 as section 21F of the Securities Exchange Act as part of the Dodd-Frank amendments, prohibit an employer from discharging, demoting, suspending, harassing, or otherwise discriminating against an employee for reporting potential violations to the SEC. The SEC has the power to bring anti-retaliation enforcement actions under the Securities Exchange Act. With the order against Paradigm Capital, the SEC has clearly shown it is willing to exercise this power.

According to the SEC’s order, Paradigm Capital violated the anti-retaliation provisions by engaging in a series of retaliatory actions against its then-head trader. The head trader reported allegedly prohibited transactions to the SEC on March 28, 2012. When he told his employer about his report to the SEC in July 2012, he was temporarily removed from the trading desk pending an investigation. Shortly thereafter, the employer, Paradigm Capital, informed the head trader/whistleblower that their relationship had been “irreparably damaged” and began to negotiate a severance agreement. Severance discussions were unsuccessful, and the whistleblower asked to return to work as head trader. Paradigm Capital allowed the whistleblower to return to his work with the same compensation, but would not return him to his previous role as head trader. Paradigm Capital relocated the whistleblower to a different office and told him to investigate and identify potential wrongdoing by the company. Paradigm Capital later accused the whistleblower of violating the company’s confidentiality policy. Ultimately, the whistleblower resigned on August 17, 2012.

The SEC found that Paradigm Capital did not have a legitimate reason for removing the whistleblower from his position as head trader, changing his job duties to focus on low-level compliance assistance rather than trading, and stripping him of his supervisory responsibilities. Therefore, the agency found that Paradigm Capital had violated the anti-retaliation provisions of the Securities Exchange Act, as well as the Investment Advisers Act of 1940, for the underlying trading. Paradigm Capital agreed to pay a total of approximately $2.2 million, including $1.7 million in disgorgement, $300,000 in civil penalties, and approximately $181,000 in pre-judgment interest to resolve the dispute. It agreed to cease and desist from further violations of the law and to hire an independent compliance consultant to conduct a comprehensive review of the company’s trading policies.

The SEC’s action sends a clear message to employers: it will exercise its new authority to bring anti-retaliation enforcement actions where it believes there is a violation of the law. According to its 2013 annual report, the SEC received over 3,200 tips from whistleblowers in 2013, a considerable increase over the number of tips it received in 2012. The SEC clearly sees whistleblower retaliation enforcement actions as one means of protecting this pipeline of tips. In a press release accompanying the June 16, 2014 order, Sean McKessy, chief of the SEC’s Office of the Whistleblower, stated 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.” Andrew J. Ceresney, director of the SEC’s enforcement division, warned that “[t]hose who might consider punishing whistleblowers should realize that such retaliation, in any form, is unacceptable.”

Companies should heed the SEC’s intention to take a more active role in pursuing these retaliation claims. The Paradigm Capital order also teaches an important lesson: changing the scope or terms of employment—including altering an employee’s job duties—can be actionable under the anti-retaliation provisions of the Securities Exchange Act, even if the change is not accompanied by a decrease in compensation. In light of the SEC’s order, employers should review their whistleblower compliance policies and procedures and train their employees to take appropriate action to comply with anti-retaliation policies. Employers should also carefully document the reasons taken for any actions against an employee so that they can explain their actions in the event of an investigation.

Topics:  Chief Compliance Officers, Dodd-Frank, Employer Liability Issues, Enforcement Actions, Investment Advisers Act of 1940, Retaliation, SEC, Securities Exchange Act, Whistleblowers

Published In: Civil Rights Updates, Labor & Employment Updates, Securities Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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