The SEC has flexed its (new…ish) muscles for the first time, penalizing Paradigm Capital Management Inc. in an enforcement action for retaliation against a whistleblower.
The Dodd-Frank Act prohibits retaliation against whistleblowers, specifically providing that “No employer may discharge, demote, suspend, threaten, harass, directly or indirectly, or in any other manner discriminate against, a whistleblower” because of certain whistleblowing activities. 15 U.S.C. §78u-6(h)(1). The regulations (specifically, 17 C.F.R. §240.21F-2(b)(2)) provide for enforcement in an action brought by the SEC.
Although Dodd-Frank was enacted in 2010, the June 16, 2014 Order marks the first time the SEC has pursued an employer for retaliation.
Specifically, the SEC found that the hedge fund advisory firm out of New York and its principal were making prohibited trades, including by failing to provide proper disclosures and obtain appropriate consents. The SEC also found that Paradigm’s Form ADV was materially misleading because it failed to disclose the principal’s conflict as a member of the conflicts committee.
The firm’s head trader reported the violations in March of 2012, and alleged that, after he notified Paradigm’s principal of his report, he was removed from his position and supervisory role and otherwise marginalized at the firm. Ultimately, the whistleblower resigned.
In anticipation of the action the SEC was poised to file, Paradigm and its principal made an offer to settle. The respondents, without admission, agreed to pay $2.2M to settle the claims (including a $300,000 penalty) and retain an independent compliance consultant.