In the first case of its kind, the U.S. Securities and Exchange Commission awarded a payment to a whistle-blower after he experienced retaliation from his employer after he reported alleged misconduct.
On Monday, the SEC said that the maximum award of $600,000 would be paid to James Nordgaard, the ex-head trader at Paradigm Capital Management Inc., an Albany, N.Y.-based registered investment advisor (RIA), and C.L. King & Associates, an affiliated broker-dealer.
In June, Paradigm Capital Management and owner Candice King Weir agreed to pay a $2.2 million settlement in the case, admitting no wrongdoing.
“Retaliation against whistle-blowers is entirely unacceptable,” said Sean McKessy, chief of the SEC’s Office of the Whistleblower. “My hope is that the award today encourages potential whistle-blowers to come forward in light of our demonstrated commitment to protect them against retaliatory conduct and make significant financial awards to whistle-blowers who suffer employment hardships as a result of reporting possible securities law violations.”
After attempting to notify his superiors, Nordgaard reported potential violations to the SEC, triggering a series of allegedly retaliatory actions by Paradigm, including removing him from his then-current position and tasking him with investigating the violations, changing his job function, stripping him of supervisory responsibilities and otherwise marginalizing him.
The case stemmed from a whistle-blower submission made to the SEC in 2012 pursuant to the Dodd-Frank Act. According to the SEC, Weir conducted transactions between Paradigm and C.L. King and Associates, a broker-dealer she also owns, while trading on behalf of a hedge fund client. Advisors are required to disclose that they are participating on both sides of the trade and must obtain the client’s consent, the SEC said.
In an effort to reduce the tax liability of the firm’s hedge fund investors, Weir allegedly directed Paradigm’s traders to sell securities that had unrealized losses from the hedge fund to a proprietary trading account at C.L. King. Over a three-year period from 2009 to 2011, Paradigm engaged in at least 83 principal transactions by selling 47 securities positions from the hedge fund, then repurchasing 36 of those positions back. The SEC said that Paradigm failed to provide written disclosure to the hedge fund client and did not obtain its consent.
In an effort to fulfill the SEC's disclosure requirements, Paradigm created a conflicts committee, consisting of its chief financial officer and chief compliance officer, to review the transactions. However, since the CFO also served in the same role for C.L. King & Associates, the SEC reasoned that Paradigm created a conflict of interest, since they could not both represent the interests of the hedge fund's investors and the brokerage that was buying the securities.
The SEC's whistle-blower awards can range from 10 percent to 30 percent of the money collected in a case. To date, the SEC has awarded 17 whistle-blowers over $50 million in payouts since its whistle-blower program began three years ago.