SEC Awards Maximum Damages to Whistleblower Under Dodd-Frank Act

The U.S. Securities and Exchange Commission (SEC) recently awarded $600,000 to a former hedge fund trader who reported possible misconduct by his employer. In the Matter of Paradigm Capital Management, Inc. and Weir, File No. 3-15930, order (PDF file) (SEC, Apr. 28, 2015). The award is the maximum amount allowable under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank”). This case is notable because it was reportedly the first enforcement action brought by the SEC under the authority conferred by Dodd-Frank. While the case involves an employer located in Albany, New York, the protections offered by Dodd-Frank apply in New Jersey and nationwide.

The complainant was the head trader for Paradigm Capital Management (“Paradigm”), an investment adviser for various hedge funds. Paradigm’s president and founder was also the president and founder of a broker-dealer called C.L. King & Associates (“C.L. King”). Both entities are incorporated in New York and headquartered in Albany.

In March 2012, the complainant reported alleged misconduct to the SEC based on potential conflicts of interest. He claimed that Paradigm was using C.L. King to execute trades of securities for certain hedge fund clients without disclosing the president’s interest in both companies to those clients. Additional conflicts of interest, according to the SEC, included having the same person serve as chief financial officer of both Paradigm and C.L. King, while also serving on Paradigm’s Conflicts Committee.

The complainant notified the president of his report to the SEC on July 16, 2012. The following day, he was reportedly removed from the trading desk, relieved of other job duties, and assigned to a different worksite. Several days later, he was told not to return to work. He and Paradigm spent several weeks trying to negotiate his resignation or termination. They were unable to agree on severance terms, but when the complainant returned to work in August, he was not allowed to resume his earlier duties. He resigned on August 17, 2012.

The SEC initiated an enforcement proceeding for violations of § 206(3) of the Investment Advisers Act of 1940, 15 U.S.C. § 80b-6(3), 17 C.F.R. § 275.206(3)-2. Paradigm and its president entered into an agreement (PDF file) with the SEC in June 2014, in which they agreed to pay nearly $2.2 million in damages. This amount included restitution of $1.7 million to investors, a $300,000 civil penalty, and more than $181,000 in prejudgment interest. The SEC then addressed the complainant’s retaliation claims.

The Dodd-Frank Act, enacted in the wake of the major financial crises that arose from Wall Street in 2007 and 2008, authorizes monetary rewards for whistleblowers who report violations of financial laws and regulations to the SEC. 15 U.S.C. § 78u-6, 17 C.F.R. § 240.21F-2. Rewards are available in cases where the SEC brings an enforcement action that results in sanctions of at least $1 million. The award is paid from a fund maintained by the SEC and may be between 10 and 30 percent of the amount collected. Dodd-Frank also protects whistleblowers from retaliation, regardless of whether they qualify for an award. In April 2015, the SEC awarded the complainant in the present case $600,000, equal to 30 percent of the restitution and civil penalty amounts.

If you need to speak to an attorney about an employment law matter in New Jersey or New York, contact the Resnick Law Group online, at 973-781-1204, or at (646) 867-7997.

More Blog Posts:

Court Rules for Whistleblower Who Made Internal Report of Alleged Financial Violations, The New Jersey Employment Law Firm Blog, March 19, 2015
Whistleblower Who Exposed Alleged Visa Fraud Files Lawsuit Claiming Retaliation by Employer, The New Jersey Employment Law Firm Blog, January 30, 2015
Federal Court Allows Police Whistleblower’s Lawsuit Against City Officials to Proceed, The New Jersey Employment Law Firm Blog, December 30, 2014

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