Regulator fines advisory firm and owner $2.2 mn after head trader ‘marginalized’
The SEC has charged hedge fund advisory firm Paradigm Capital Management with retaliation against a whistleblower, marking the regulator’s first such action since it received the authority to police the controversial practice in 2011.
The US market regulator has levied a fine of $2.2 mn against Paradigm and its owner, Candace King Weir, for engaging in prohibited principal transactions before demoting and ‘marginalizing’ the fund’s head trader when management found out he had reported the trades to the SEC. Weir and Paradigm have since agreed to pay the fine.
The SEC says Paradigm, while trading on behalf of a hedge fund client, conducted transactions with a broker-dealer also owned by Weir without informing the client it was participating on both sides of the trade. Paradigm used the trades to capture unrealized losses and use them to offset taxes, the regulator reports.
Paradigm’s chief trader, who was not named by the SEC, reported the activity to the regulator. A subsequent investigation found evidence of similar trading activity between 2009 and 2011.
‘After learning that he had reported potential violations to the SEC, Paradigm immediately engaged in a series of retaliatory actions,’ reads the SEC’s report. ‘Paradigm removed him from his head trader position, tasked him with investigating the very conduct he reported to the SEC, changed his job function from head trader to a full-time compliance assistant, stripped him of his supervisory responsibilities, and otherwise marginalized him.’
Paradigm and Weir agreed to disgorgement of $1.7 mn for distribution to current and former investors in the hedge fund, the SEC says. The advisory firm and its owner will also pay prejudgment interest of $181,771 and a penalty of $300,000, while Paradigm agreed to retain an independent compliance consultant.
‘For whistleblowers to come forward, they must feel assured they’re protected from retaliation and the law is on their side should it occur,’ says Sean McKessy, head of the SEC’s office of the whistleblower, in a press release. ’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 in reporting a possible securities law violation.’
