SEC Charges Hedge Fund Adviser with Whistleblower Retaliation under Dodd-Frank

On June 16, 2014, the SEC issued its first-ever charge of whistleblower retaliation under section 922 of the Dodd-Frank Act, charging a hedge fund advisor and its owner with “engaging in prohibited principal transactions and then retaliating against the employee who reported the trading activity to the SEC.”

Paradigm Capital Management and owner Candace King Weir agreed to pay $2.2 million to settle the charges, consisting of $1.7 million of disgorgement, a $300,000 civil penalty, and pre-judgment interest on the disgorgement amount. A separate civil suit brought by the whistleblower was settled by the parties in December, 2012.

According to the SEC’s order instituting a settled administrative proceeding, the whistleblower, who was Paradigm’s head trader, made a report of potential securities law violations to the SEC in March 2012, and continued to work for several months thereafter without incident. According to the SEC’s allegations, however, a day after revealing himself as a whistleblower on July 16, 2012, Paradigm removed him from his head trader position, tasked him with investigating the conduct he reported to the SEC, stripped him of his supervisory responsibilities, and otherwise marginalized him, leading to his resignation.

Commenting on the order, Sean McKessy, chief of the SEC’s Office of the Whistleblower, stated, “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.”

The SEC’s authority to pursue firms for anti-retaliation violations does not arise from the Dodd-Frank statute itself but from its rule implementing section 922 of Dodd-Frank. Notably, the Commodity Futures Trading Commission (“CFTC”), which has a nearly identical whistleblower program under Dodd-Frank, takes the position that it does not have authority to enforce the Act’s anti-retaliation provisions. It remains to be seen whether the SEC’s position will be upheld in the courts. It also remains to be seen whether the Paradigm whistleblower will apply for and receive a six-figure bounty from the SEC in addition to the remedies he has already secured to date under Dodd-Frank’s whistleblower program.


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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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