(Adds comments from SEC enforcement director and
By Sarah N. Lynch
WASHINGTON, June 16 U.S. securities regulators
flexed their new powers to protect whistleblowers on Monday, in
civil charges accusing a hedge fund advisory firm of improperly
demoting its former head trader after he reported concerns about
certain conflicted trades.
The Securities and Exchange Commission's case against
Albany, New York-based Paradigm Capital Management and owner
Candace King Weir marks the first time the agency has ever
brought charges over whistleblower retaliation - a new authority
Congress bestowed on the agency in 2010.
Paradigm and Weir agreed to settle the charges and pay $2.2
million, the bulk of which will go back to harmed investors.
A spokesman for Paradigm and Weir said they were "pleased to
resolve this matter and have it behind us."
Weir also settled charges that she conducted conflict-ridden
trades between Paradigm and a brokerage that Weir owned on
behalf of a hedge fund client without disclosing it.
Trades that could create conflicts between advisers and
clients must be properly disclosed and receive client consent
prior to being executed.
"Paradigm retaliated against an employee who reported
potentially illegal activity to the SEC," said Andrew Ceresney,
the director of the SEC Enforcement Division. "Those who might
consider punishing whistleblowers should realize that such
retaliation, in any form, is unacceptable."
The 2010 Dodd-Frank Wall Street reform law gave the SEC the
power to start a new whistleblower program that lets the agency
reward people who report misconduct, if that tip leads to the
collection of more than $1 million in monetary sanctions.
Whistleblowers who meet the criteria are eligible to receive
between 10 and 30 percent of the total amount collected.
Ceresney told reporters on Monday that the whistleblower in
this case will be eligible to file a request to be considered
for a reward.
Congress gave the SEC the new powers as a response to the
Bernie Madoff scandal, when the SEC had received numerous tips
and yet failed to detect Madoff's Ponzi scheme for decades.
Part of the new power also gave the SEC the ability to
shield whistleblowers from retaliation, a provision that went
into effect in 2011 after the SEC adopted its new whistleblower
According to the SEC, Paradigm's head trader learned about
the conflicted principal transactions and reported them to the
SEC in March 2012.
After his employer learned about his role as a
whistleblower, he was removed from the trading desk, told to
work offsite at a different building, asked to investigate the
conduct he had reported, and stripped of his supervisory
The SEC said that the whistleblower, whose identity was not
revealed, ultimately resigned later that year.
The whistleblower's lawyer, Jordan Thomas of Labaton
Sucharow LLP, said cases like this should help encourage
whistleblowers to come forward and predicted their help could
eventually lead to record-breaking enforcement records.
"I often advise my clients that it's not always easy or
glamorous to be a corporate whistleblower, but the SEC has their
back," he said.
(Reporting by Sarah N. Lynch; Editing by Grant McCool)