Every company claims that they encourage a “speak up” culture. As part of a “speak up” culture, companies encourage managers and employees to raise concerns about potential violations and promise not to retaliate against anyone who raises a concern.
Some companies mean what they say and some do not. The SEC recently brought its first enforcement action against a company for retaliating against a whistleblower. The SEC has trumpeted this case as a reminder to companies to avoid retaliating against whistleblowers.
On June 16, 2014, the SEC issued an order against Paradigm Capital Management, a registered investment adviser, and its principal for engaging in trades with effective client disclosure and consent, and for retaliating against an employee who reported such violations to the SEC.
This was the first case that the SEC brought for violations of the anti-retaliation provisions under Section 21F of the Securities Exchange Act., which prohibits an employer from “terminating, demoting, suspending, threatening, harassing or otherwise discriminating against an employee for reporting potential violations to the SEC. In May 2011, the SEC adopted rule to implement Section 21F which included anti-retaliation protections.
From 2009 through 2011, Paradigm executed multiple trades with an affiliated broker-dealer controlled and owned by Paradigm’s principal without subjecting the trades to review by its conflicts committee and disclosing the conflicts in its form ADV. As it turned out the conflicts committee was itself conflicted because one of its members was also the chief financial officer of the affiliated broker-dealer.
In May 2012, Paradigm’s head trader reported the illegal transactions to the SEC. The head trader later told Paradigm he had reported the trades. Paradigm immediately removed the trader from the trading desk and stripped him of his day-to-day trading and supervisory responsibilities. Also, Paradigm directed the trader to prepare a report about the alleged trading violations and told him to do so at an off-site location.
The trader requested on numerous occasions to resume his regular trading and supervisory position but Paradigm rejected his requests. The trader resigned.
The SEC concluded that Paradigm retaliated against the trade for reporting the trading violations to the SEC. Without admitting or denying any wrongdoing, Paradigm and its principal agreed to pay disgorgement of $1.7 million, prejudgment interest of $181,771 and a civil penalty of $300,000.
The facts, as described in the enforcement action, provide a clear-cut case of retaliation. The SEC’s Office of the Whistleblower stated in a press release, “[the SEC] will continue to exercise 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 action underscores the risks of altering employment conditions of an employee who has acted as a whistleblower. If necessary, a company should only make changes when motivated by reasons other than the employee’s whistleblower status and is well documented to ensure that evidence exists to support its action.