Conflicts At Fund Adviser Yields First SEC Whistleblower Action

by Dorsey & Whitney LLP

The Commission brought its first action involving the anti-retaliation provisions of the Dodd-Frank Act. It centers on an investment adviser, a broker dealer, conflicts and retaliation against a firm employee who reported the misconduct to the SEC and later informed his employer of that report. In the Matter of Paradigm Capital Management, Inc, Adm. Proc. File No. 3-15930 (June 16, 2014).

The conduct

The proceeding names as Respondents Paradigm, a registered investment adviser, and Candace King Weir, its founder, director, president and CIO. Ms. Weir also owns about 74% of C.L. King & Associates, Inc., a registered broker dealer. Paradigm advises a hedge fund.

Beginning in 2009, and continuing for the next two years, Paradigm sought to reduce the tax liability of Fund investors. A plan was implemented under which securities with unrealized losses were either sold into the open market or to a trading account at C.L. King. The trading losses were then used to offset realized gains.

During the period Paradigm engaged in at least 83 principal transactions with the broker dealer. Ms. Weir, acting as portfolio manger, made the trading decisions. After evaluating the security if she thought it might be repurchased, the shares would be sold to the trading account at the broker dealer. Approximately 47 of the transactions were with C.I. King. About 36 of the positions were repurchased. The others were sold into the open market.

Since all of the transactions between Paradigm and C.L. King were principal transactions, written disclosure was required to the Fund. The Fund did not have a board of directors to receive the disclosures and consent. Accordingly, a Conflicts Committee was established to review the transactions. It was composed of Paradigm’s COO and CFO. Paradigm’s CFO also served as the CFO of C. L. King. The Conflicts Committee thus had a conflict. This was underscored by the fact that each time the broker dealer purchased securities from the Fund, the transaction had a negative impact on its net capital.

Paradigm failed to provide effective notice of the conflicts since disclosure could not be made to the Fund and the Conflicts Committee was ineffective because of conflicts. The firm’s Form ADV Part 2A was rendered materially misleading since it failed to disclosure the CFO’s conflict.

The whistleblower

Pardigm’s former head trader voluntarily made a whistleblower submission to the Commission in March 2012 regarding the principal transactions. He continued at the firm as head trader until mid-July 2012. He then notified Ms. Weir and the COO of the broker dealer of his whistleblower report.

Subsequently, the head trader was reassigned to investigate the trades that were the subject of his report to the Commission. The report was prepared while working at home, an arrangement sanctioned by the firm. During that period the head trader was denied access to the firm’s trading and account systems. The report was complete and submitted to the firm at the end of July.

After completion of the report, Paradigm informed counsel to the head trader that the employment relationship was “irreparably damaged.” The parties tried, but failed, to work out a severance package.

In early August the head trader was directed to return to work. He was assured that his compensation would remain the same. Paradigm refused to specify his exact duties, although it was clear that he would no longer serve as head trader. Eventually he was directed to determine if the firm had engaged in any other wrongful conduct. This review was to be conducted by analyzing 1,900 pages of trading data. A request to review the electronic reports was denied. Subsequently, the head trader was tasked with consolidating multiple trading procedure manuals into one comprehensive document and proposing revisions to enhance the firm’s procedures. That assignment was the outgrowth of the head traders’ statement that firm procedures were inadequate

Additional disputed regarding his duties and the manner in which his assignments were to be conduct followed. The head trader resigned on August 17, 2012. There was no legitimate reason form removing him from the position of head trader, according to the Order. The Order alleges violations of Exchange Act Section 21F(h), and Sections 206(3) and 207 of the Advisers Act.


To resolve the proceeding Respondents agreed to implement a series of undertakings. Those include an obligation to distribute $1.7 million to compensate certain investors in the Fund for administrative fees paid in connection with the principal transactions. Paradigm will also retain an Independent Compliance Consultant who will review and analyze firm policies and make recommendations which will be adopted.

Paradigm consented to the entry of a cease and desist order based on the Sections cited in the Order. Ms Weir consented to the entry of a similar order but based on Section 206(3) of the Advisers Act. Respondents also agreed to pay, jointly and severally, disgorgement of $1.7 million, prejudgment interest and a civil penalty of $300,000. The $1.7 million payment will be deemed satisfied by the distribution to investors in the undertakings.


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.

© Dorsey & Whitney LLP | Attorney Advertising

Written by:

Dorsey & Whitney LLP

Dorsey & Whitney LLP 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.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

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.


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 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:

- 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.