SEC Charges Hedge Fund Adviser With Whistleblower Retaliation Under Dodd-Frank

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SEC Charges Hedge Fund Adviser With Whistleblower Retaliation Under Dodd-Frank

Earlier this week, the SEC, for the first time, issued a charge of whistleblower retaliation under section 922 of the Dodd-Frank Act, charging a hedge fund adviser and its owner with “engaging in prohibited principal transactions and then retaliating against the employee who reported the trading activity to the SEC.” Paradigm Capital Management and its owner, Candace King Weir, agreed to settle the charges by paying $2.2 million, including $1.7 million of disgorgement, a $300,000 civil penalty, and pre-judgment interest on the disgorgement amount. The whistleblower, himself, had previously brought a separate suit which was settled in 2012.

The whistleblower, who was Paradigm’s head trader, reported potential securities law violations to the SEC in March 2012 and continued to work there without issue for a number of months after the report. However, on July 16, 2012, he revealed himself as a whistleblower. A day later, Paradigm removed him from his head trader position, ordered him to investigate the conduct he reported to the SEC, stripped him of his supervisory responsibilities, while further marginalizing him, ultimately leading to his resignation.

Sean McKessy, chief of the SEC’s Office of the Whistleblower stated, “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.”

The SEC’s power to pursue firms for anti-retaliation violations does not actually arise from the Dodd-Frank statute itself but instead from its rule implementing section 922 of Dodd-Frank. Interestingly though, the Commodity Futures Trading Commission has a nearly identical whistleblower program under Dodd-Frank but does not claim to have authority to enforce the Act’s anti-retaliation provisions. Accordingly, the SEC’s position will have to be upheld in court in order to determine whether or not it has this stated authority. Additionally, it remains to be seen whether the whistleblower in this case will apply for and receive a six-figure bounty from the SEC in addition to the remedies already secured to date under Dodd-Frank’s whistleblower program.

If you or someone you know has lost money as a result of an investment, please contact Richard Frankowski at 888-741-7503 to discuss your potential legal remedies.

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