Now that the SEC’s whistleblower program is in full operation, the enforcement action highlighted here may become more of a common occurrence. This enforcement action against Paradigm Capital Management, Inc. (“Paradigm”), an SEC registered investment adviser, and its principal owner, Candace King Weir, is based on their retaliation against a Paradigm employee who made a whistleblower submission to the SEC in 2012 regarding certain unlawful principal transactions conducted for a client by Paradigm.
The underlying conduct exposed by the whistleblower, who was Paradigm’s head trader at the time, involved the period of 2009 through 2011 and Paradigm’s engagement in principal transactions with C.L. King & Associates, Inc., an affiliated broker-dealer, without first disclosing to, or obtaining consent from, the client that purchased the securities involved in the transactions, which is a violation of Section 206(3) of the Investment Advisers Act of 1940. After discovering that the employee reported the violations to the SEC, Paradigm engaged in retaliatory actions that ultimately resulted in the employee’s resignation from the investment adviser in 2012. Paradigm, upon discovering that the employee had made the whistleblower submission to the SEC, removed the employee as head trader, changing his job function instead to “compliance assistant,” stripping him of any supervisory responsibilities, and “otherwise marginalized him.”
As a result of the retaliation, the SEC alleged that Paradigm violated Section 21F(h) of the Securities Exchange Act of 1934, which specifically prohibits retaliatory actions against a whistleblower. The SEC further alleges violations by Paradigm of Section 206(3), in connection with making principal transactions in a client’s account without obtaining the client’s prior consent, and Section 207 of the Advisers Act, which makes it unlawful to make any untrue statement of a material fact in any registration application or report filed with the SEC. As to the later allegation, the SEC alleges that Paradigm, in effect, had materially misstated within its Form ADV its treatment of principal transactions for client accounts.
Both Paradigm and Ms. Weir agreed to settle the SEC’s enforcement action by, among other things, agreeing jointly and severally, to distribute a total payment of $1,700,000 to compensate certain investors who had invested in the Fund during the time of the unlawful principal transactions, engage the services of an independent compliance consultant to conduct a comprehensive review of Paradigm’s supervisory, compliance and other policies and procedures designed to prevent and detect prohibited principal transactions, the issuance of the SEC’s cease and desist order, and the payment of a civil penalty in the amount of $300,000.
This enforcement action by the SEC demonstrates the protections afforded whistleblowers by Congress under the Dodd-Frank legislation and the conviction by the SEC to act forcefully against those persons who take retaliatory actions against whistleblowers.