New York (HedgeCo.Net) – NY hedge fund advisory firm Paradigm Capital Management and its owner Candace King Weir have agreed to pay $2.2 million to settle SEC charges of engaging in prohibited behavior and then retaliating against the employee who reported the trading activity to the SEC.
The SEC says that after Paradigm learned that the firm’s head trader had reported potential misconduct to the SEC, the firm engaged in a series of retaliatory actions that ultimately resulted in the head trader’s resignation. A Commission rule adopted in 2011 under the Dodd-Frank Act authorized the SEC to bring enforcement actions based on retaliation against whistleblowers who report potential securities law violations to the agency.
This is the first time the SEC has filed a case under its new authority to bring anti-retaliation enforcement actions. The SEC also charged the firm’s owner with causing the improper principal transactions.
“Paradigm retaliated against an employee who reported potentially illegal activity to the SEC,” said Andrew J. Ceresney, director of the SEC Enforcement Division. “Those who might consider punishing whistleblowers should realize that such retaliation, in any form, is unacceptable.”
The SEC said: “Paradigm’s head trader reported trading activity revealing that Paradigm engaged in prohibited principal transactions with affiliated broker-dealer C.L. King & Associates while trading on behalf of hedge fund client PCM Partners L.P. II. The SEC’s subsequent investigation found that Paradigm engaged in the trading strategy from at least 2009 to 2011 to reduce the tax liability of the firm’s hedge fund investors. As part of that strategy, Weir directed Paradigm’s traders to sell securities that had unrealized losses from the hedge fund to a proprietary trading account at C.L. King. The realized losses were used to offset the hedge fund’s realized gains. Paradigm engaged in at least 83 principal transactions by selling 47 securities positions from the hedge fund to C.L. King and then repurchasing 36 of those positions for the hedge fund.”
“For whistleblowers to come forward, they must feel assured that they’re protected from retaliation and the law is on their side should it occur,” said Sean McKessy, chief of the SEC’s Office of the Whistleblower. “We will continue to exercise our anti-retaliation authority in these and other types of situations where a whistleblower is wrongfully targeted for doing the right thing and reporting a possible securities law violation.”
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