SEC Files Charges Under New Anti-Retaliation Law

SEC Files Charges Under New Anti-Retaliation Law

The Securities and Exchange Commission (SEC) has filed charges of conducting conflicted transactions and retaliating against a whistleblower against Paradigm Capital Management. The firm’s owner, Candace King Weir, also faces charges in the case. Paradigm and Weir agreed to settle the case for $2.2 million.

Details on the case

In the case, officials say Weir conducted transactions between a broker-dealer she also owns (C.L. King & Associates) and Paradigm while conducting trades for a hedge fund client (PCM Partners L.P. II). These transactions create conflicts of interest between the client and the adviser. As a result, hedge fund advisers are required to disclose that they play roles on both sides of the trade. The client must then consent in order for the trade to proceed. According to the SEC, Paradigm did not disclose its conflict to the hedge fund client or obtain its consent.

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Officials said Paradigm tried to handle the conflicts of interest on its own by forming a two-person conflicts committee to review and approve all of the transactions conducted for the hedge fund. However, officials say both of the people on that committee reported to Weir herself—the one who had the conflicts because she owns both C.L. King and Paradigm. In addition, one of the people on the committee was chief financial officer for both Paradigm and C.L. King, which placed him in conflict as well.

According to court documents, Weir told Paradigm’s traders to sell securities with unrealized losses from the hedge fund to “a proprietary trading account at C.L. King.” They say Paradigm took part in 83 or more principal transactions, selling 47 securities positions from the hedge fund to King and then buying back 36 of those positions for the hedge fund. Officials say Paradigm continued this trading strategy from at least 2009 to 2011 for the purpose of reducing its hedge fund investors’ tax liability.

SEC exercises new power

In the course of its investigation, the SEC found that Paradigm’s head trader, who reported the possible misconduct to regulators, was retaliated against by the firm. Officials say the firm “engaged in a series of retaliatory actions” that led to the head trader resigning. They say Paradigm stripped the trader of his head trader position, changed his position to full-time compliance assistant, told him to investigate the conduct he had reported to regulators, demoted him, and “otherwise marginalized him.”

The SEC received the power to charge someone with retaliating against whistleblowers under a provision in the 2011 Dodd-Frank Act. This is the very first time since the SEC received the power to charge someone with retaliating a whistleblower the agency has exercised this power. Jordan Thomas from law firm Labaton Sucharow LLP represented the whistleblower in this case and played a leadership role in the development of the SEC Whistleblower Program as a former assistant director in the SEC’s Enforcement Division. He says this action is very significant because most of those who blow the whistle are indeed retaliated against after they attempt to report wrongdoing on Wall Street.

“I often advise my clients that it’s not always easy or glamorous to be a corporate whistleblower, but the SEC has their back and the ability to remain anonymous when reporting possible securities violations can make doing the right thing a lot easier,” said Thomas in a statement. “… In the coming years, based upon my experience at the SEC and now in private practice, I believe enforcement records will be broken and many of the Commission’s most significant enforcement actions will be the result of courageous whistleblowers.”

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