Protecting Whistleblowers: The SEC’s First Anti-Retaliation Enforcement Case

A landmark case of whistleblower anti-retaliation enforcement has recently been settled between the Securities and Exchange Commission (“SEC”) and the advisory firm Paradigm Capital Management (“Paradigm”) and Candace King Weir (“Weir” the majority owner of paradigm) in the first case of its kind under the SEC’s “new authority to protect whistleblowers against retaliation by employers.” After a trader exposed evidence to the SEC of Weir’s involvement in causing Paradigm to engage in principal transactions to reduce tax liability on behalf of its hedge fund investors without effective disclosures or consent, Paradigm targeted the trader for retaliation. The SEC pressed anti-retaliation charges, amongst others, resulting in a settlement of $2.2 million paid out by Paradigm without the admission of wrongdoing.

 

In the cease-and-desist order against Paradigm, the SEC alleges that the adviser did not provide effective written disclosure to its clients due to Ms. Weir’s conflict of ultimately controlling both Paradigm and the broker-dealer. Even though disclosure and consent was provided to a “conflict committee” on behalf of PCM Partners, LP II (the “fund” and client of the adviser), such consent was not effective due to the fact that Paradigm’s Chief Financial Officer (“CFO”) who also served as the broker-dealers CFO, could not provide such approval because he was conflicted. The consent should have been given to the underlying fund investors instead.

 

The head trader voluntarily made a whistleblower submission to the SEC regarding these principal transactions. Three months later when the head trader opted to disclose his actions to Weir, retaliation occurred. The firm demoted the trader to compliance assistant and forced him to investigate “the very conduct he reported to the SEC”, while also “stripping him of his supervisory responsibilities, and otherwise marginalizing him.” The SEC’s actions against Paradigm’s retaliation efforts highlights a move into a new era of whistleblower protection, where whistleblowers can come forward and “feel assured that they’re protected from retaliation, and the law is on their side should it occur.”

 

For further information on this and other related subjects, please contact us at info@jackolg.com  or (619) 298-2880.

 

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