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.

SEC Alert: Scottrade $2.5MM Settlement

It seems the U.S. Securities and Exchange Commission is one of the busiest federal agencies lately, as it brought down the hammer once again, this time obtaining a $2.5 million penalty from Scottrade, Inc. by way of settlement.  From March of 2006 until 2012, an affiliate of Scottrade, Inc. failed to provide the SEC with accurate “blue sheets,” which essentially log the details of all trading activity both within a firm and with its customers.  Blue sheet data is necessary for the SEC to identify and analyze trades in the course of investigations and other work, as they contain the details of each equity or options trade that is routed through clearing broker-dealers.  (They are called “blue sheets” because the form was blue, but in the ‘80s, the process became electronic.  Still, the term “blue sheet” is commonly used.)

Notably, Scottrade Inc. had to admit as part of the settlement that it was guilty, particularly admitting it violated the recordkeeping provisions of the federal securities laws. The chairman of the SEC, Mary Jo White, announced this past June that the SEC will require defendants in such cases to admit wrongdoing, whereas it previously had a policy of “no admit, no deny” in connection with settlements.  The Scottrade admission marks the fourth overall, another being in connection with the $6 billion settlement with JPMorgan Chase & Co.  The requirement of admitting guilt shows the seriousness of the charges, and that the SEC is more than just a commission seeking to add another “cost of doing business” but instead a fully engaged and equipped policing agency charged with investigating, prosecuting, and hopefully deterring financial crime.  And, an admission of guilt impacts the company’s reputation, whereas pure financial penalties often do not.

Scottrade was also required to cease and desist from committing or causing any violations and any future violations of Section 17(a) of the Securities Exchange Act of 1934 and Rules 17a-4(j), 17a-25, and 17a-4(f)(3)(v).  Scottrade has also agreed, in addition to paying its hefty penalty, to undertake remedial measures, such as retaining an independent consultant to review its supervisory, compliance, and other policies and procedures designed to detect and prevent securities laws violations related to blue sheet submissions.

SEC Insider Trading Alert: Teo’s Musicland Insider Trading Appeal Unsuccessful

On February 10, 2014, the Third Circuit Court of Appeals affirmed a lower federal court’s jury verdict of insider trading against Alfred Teo and a trust he controlled.  Alfred Teo Sr., a former shareholder in Musicland Stores Corp, a conglomerate company that oversaw numerous music endeavors including Sam Goody music stores and Suncoast Motion Picture Co. video shops, was found guilty of insider trading.  Teo and his trust were ordered to disgorge gains of $17,000,000 and to pay prejudgment interest of an additional $14,000,000.  Teo received and traded on confidential information from insiders of Musicland about an impending all cash tender offer by Best Buy for all the shares of Musicland. The decision in SEC v. Teo is another stark illustration of the painful economic consequences of insider trading.

The perceived benefits of trading on material nonpublic information are usually overwhelmed by the emotional, reputational and economic sanctions that flow from detection and prosecution by federal authorities.  Teo misappropriated valuable nonpublic information and shared it with others who also traded.  Everyone who receives and trades on nonpublic information can pay the price.  Under federal securities laws, insider trading law subjects the wrongdoer to the equitable remedy of disgorgement of all ill-gotten economic gains.  In addition, prejudgment interest on the disgorgement amount, calculated from the date of the violation at the IRS underpayment interest rate, can be awarded.  Furthermore, a money penalty in an amount up to the amount of the ill-gotten gain also can be imposed.  Those found guilty of insider trading also can be permanently barred from serving as an officer or director of a public company.  Securities Exchange Commission investigations and litigation can drag on for, literally, years with ever mounting legal fees, anxiety and stress.

Historically, the SEC has enjoyed a success rate of nearly 80% in the cases that go to trial.  Although the agency has lost some high profile cases recently, the odds and the costs are still heavily tilted in favor of the government when it brings insider trading charges.  Despite its stellar track record, the SEC encourages and rewards cooperation by those who become parties to SEC insider trading investigations. If you believe you may be involved in a questionable securities transaction, you should contact an experienced securities lawyer right away.  Kang Haggerty provides confidential consultations and represents parties in SEC enforcement investigations and securities litigation.