SEC Makes First Finding of Retaliation in Violation of the Exchange Act’s Anti-Retaliation Rule

by Burr & Forman
Contact

On June 16, 2014, the SEC entered an order (the “Order”) instituting cease and desist proceedings against an investment adviser, Paradigm Capital Management, Inc. (“Paradigm”), and Paradigm’s founder, Director, President, Chief Investment Officer, and Portfolio Manager, Candace King Weir (“Weir”).  The Order made findings and imposed a cease and desist order against Paradigm and Weir. In the Order, the SEC found that Paradigm and Weir had engaged in improper trading activity and that Paradigm had retaliated against Paradigm’s head trader (the “Whistleblower”) after the Whistleblower reported the improper trading activity to the SEC.

Over the course of two years, Paradigm engaged in multiple transactions with a broker-dealer on behalf of a hedge fund client. Weir owned Paradigm and the broker-dealer, and also controlled the general partner of the hedge fund client. Because of Weir’s common ownership and control over the three entities involved, Paradigm was required to disclose, in writing, that Weir had interests on both sides of the trades and to obtain the hedge fund client’s consent to the trades. Although Paradigm attempted to satisfy the written disclosure and consent requirements by establishing a conflicts committee to review and approve the transactions at issue, the SEC found that the conflicts committee was insufficient because the committee itself was conflicted. In particular, the conflicts committee consisted of only two people, one who reported directly to Weir and one who was conflicted because he served as the CFO of both Paradigm and the broker-dealer engaging in the trades at issue.

Paradigm’s “head trader,” the Whistleblower, reported Paradigm’s potential violations to the SEC. The day after informing Paradigm that he had reported the potential violations, Paradigm removed the Whistleblower from the trading desk and “temporarily” relieved him of his day to day trading and supervisory responsibilities. Paradigm also informed the Whistleblower that his actions needed to be investigated, and he was instructed to work in a different office building and compile a report detailing the facts supporting the potential violations he reported to the SEC. Thereafter, the Whistleblower was denied access to Paradigm’s trading and account systems and to his existing email account with Paradigm. Approximately one week after the Whistleblower reported the potential violations, Paradigm informed the Whistleblower’s employment counsel that the employment relationship was “irreparably damaged” and Paradigm wanted to work out a severance package. After those negotiations stalled, Paradigm permitted the Whistleblower to return to work, but removed him as head trader and continued to deny him access to Paradigm’s trading system. Ultimately, the Whistleblower resigned approximately one month after reporting the potential violations to the SEC.

The SEC concluded that Paradigm had no “legitimate reason” for removing the Whistleblower from his position as head trader, changing his job function, stripping him of his supervisory responsibilities, and “otherwise marginalizing him.” Thus, the SEC found, Paradigm’s actions violated Section 21F(h) of the Exchange Act, the Act’s anti-retaliation provisions, which prohibit an employer from discharging, demoting, suspending, threatening, harassing, or in any other manner discriminating against a whistleblower because of any lawful act done by the whistleblower in, inter alia, providing information to the SEC.

As a result of the trading violations and the retaliation against the Whistleblower, Paradigm and Weir were ordered to disgorge $1.7 million to the hedge fund client for fees paid by the client and to pay a civil penalty of $300,000. Paradigm and Weir were also ordered to pay $181,771 in prejudgment interest, for a total monetary fine of $2,181,771.

 

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.

© Burr & Forman | Attorney Advertising

Written by:

Burr & Forman
Contact
more
less

Burr & Forman on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.