The Securities and Exchange Commission today announced it reached settlement agreement with an Albany, N.Y.-based hedge fund advisor in a case involving prohibited principal transactions and whistleblowing.
The agency said that Paradigm Capital Management and its owner, Candace Weir, agreed to pay $2.2 million to the SEC to settle charges that it retaliated against its then-head trader who reported to the agency about prohibited principal transactions conducted by Weir between Paradigm and a broker-dealer she also owns, C.L. King & Associates, while trading on behalf of a hedge fund client, PCM Partners L.P. II.
The retaliatory measures––which included removing the whistleblower from Paradigm’s trading desk, stripping him of his trading and supervisory responsibilities, and denying him access to the firm’s computer systems––eventually led to his forced resignation.
This is the first whistleblower anti-retaliation action taken by the SEC under powers granted to the regulator three years ago by the Dodd-Frank Act.
In a press conference, SEC Enforcement Director Andrew Ceresney said the case underscores the care advisors are legally required to take when engaging in principal transactions for clients. Both Ceresney and SEC exams chief Drew Bowden have labeled conflicts of interest one of the agency’s top priorities in reviewing advisors.
According to the SEC, Paradigm failed to provide effective written disclosure to the hedge fund of the transactions and did not obtain its required consent.
The regulator noted that Paradigm attempted to resolve the problem by establishing a conflicts committee, but said the committee itself was conflicted because it consisted of two people––Paradigm’s chief financial officer and chief compliance officer––who both essentially reported to Weir. Furthermore, Paradigm’s CFO also served as C.L. King’s CFO, which placed him in a conflict.
The $2.2 million assessment against Paradigm includes $300,000 in penalties and $1.7 in restitution to current and former investors in the hedge fund, with the rest of the sum being interest charges.
In addition to the fine, Paradigm has agreed to hire an independent compliance consultant to conduct a comprehensive review of Paradigm’s supervisory, compliance, and other policies and procedures designed to prevent and detect prohibited principal transactions