Paradigm Capital Management Inc. made prohibited trades and then retaliated against the firm’s head trader for reporting the violations, U.S. regulators said.
The hedge fund advisory firm, based in Albany, New York, and its owner Candace King Weir agreed to pay $2.2 million to settle Securities and Exchange Commission claims, the agency said in an administrative order filed today. Weir and the firm settled the claims without admitting or denying wrongdoing.
The case marks the first time the SEC has brought an enforcement action for retaliation against a whistle-blower since the agency set up the program in 2011 to reward individuals who report securities violations. The 2010 Dodd-Frank Act gave the agency the authority to pay whistle-blowers and punish retaliation against them.
“Paradigm retaliated against an employee who reported potentially illegal activity to the SEC,” Andrew Ceresney, director of the SEC’s enforcement division, said in a statement. “Those who might consider punishing whistle-blowers should realize that such retaliation, in any form, is unacceptable.”
From at least 2009 to 2011, Weir caused the firm to engage in a trading strategy to reduce tax liability of its investors, the SEC said. As part of that strategy, she directed Paradigm’s traders to sell certain securities at prevailing market prices from the fund to a proprietary trading account that she controlled through a brokerage she owns, C.L. King & Associates.
Chris Kittredge, a spokesman for Paradigm and Weir, said the firm and its owner “are pleased to resolve this matter.”
Paradigm failed to provide effective disclosure to its hedge-fund client that the firm was participating in both sides of the trade, posing a conflict of interest. In such scenarios, the client has to be made aware of the conflict of interest and consent to the transaction.
The head of trading at Paradigm made a whistleblower submission in March 2012 to the SEC detailing the trades between Paradigm and C.L. King. The trader was subsequently demoted and stripped of supervisory responsibilities, the agency said.
“For whistle-blowers 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.
Weir and the firm paid a $1.7 million disgorgement fee, $181,771 of prejudgment interest and a $300,000 penalty. Phone calls to Weir and her attorney, Boaz Morag at Cleary Gottlieb Steen & Hamilton LLP, weren’t immediately returned.
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