Whistleblower Retaliation

A year ago, the Securities and Exchange Commission charged Paradigm Capital Management with engaging in prohibited transactions and then retaliating against the head trader who reported the trading activity to the SEC. It was the first time the SEC filed a case under its new authority to bring anti-retaliation enforcement actions. Now it has handed part of the penalty to the whistleblower.

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The underlying problem, according to the SEC’s order, was that the firm’s principal conducted transactions between Paradigm and a broker-dealer that she also owned while trading on behalf of a hedge fund client. Principal transactions pose conflicts between the interests of the adviser and the client. Under an SEC rule advisers are required to disclose that they are participating on both sides of the trade and must obtain the client’s consent.

It’s tricky to effectuate consent for a hedge fund. Most hedge funds are privately-owned so there is no board of directors to act on behalf of the fund. The head trader and the SEC thought that the hedge fund’s conflict process was ineffective. Paradigm made the mistake of mistreating the head trader, turning the actions into retaliation against the whistleblower. Paradigm settled the case for $2 million.

In turn, the SEC granted the whistleblower the maximum award of 30% of the settlement.

The whistleblower first submitted the case to the SEC in March 2012 and disclosed that he or she had done so to Paradigm in July 2012, suffering a month of mistreatment before resigning. It took two years before the SEC settled the case with Paradigm and another year for the whistleblower to receive the award.

That’s a long time for the wheels of justice to turn for the whistleblower.

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