Whistleblower Update: SEC Resolves First Case Under New Authority to Bring Anti-Retaliation Claims

The Securities and Exchange Commission ("SEC") announced a settlement on Monday, June 16, 2014 that marked its first case to protect a whistleblower under the anti-retaliation provisions of the whistleblower reward program enacted as part of the Dodd-Frank Act. This direct enforcement authority by the SEC complements the traditional civil remedies available under Sarbanes-Oxley to whistleblowers claiming retaliation.¹ The enforcement action and settlement, along with the SEC’s related statements, underscore the seriousness with which the SEC views whistleblower retaliation and its whistleblower protection mandate.

In an administrative action, the SEC accused Paradigm Capital Management Inc. and its owner, Candace King Weir, of improperly retaliating against a trader for acting as a whistleblower and disclosing transactions that were allegedly improper because of an undisclosed conflict of interest.

According to the SEC, when Paradigm learned that its head trader had reported the potential misconduct to the SEC, the firm engaged in a series of retaliatory actions, including stripping him of his title and authority and otherwise marginalizing him until he eventually resigned.

The firm agreed to pay approximately $2.2 million to settle the SEC’s charges related to the alleged retaliation and principal trading violation, though the firm did not admit or deny wrongdoing. The majority of the sanction, $1.7 million, was designated for disgorgement of administrative and other fees that will be returned to investors, $181,771 amounts to prejudgment interest, and the remaining $300,000 was the actual penalty.²

The SEC’s public statements in connection with the settlement confirm its previously expressed commitment to continue pursuing such anti-retaliation efforts.

“Paradigm retaliated against an employee who reported potentially illegal activity to the SEC,” said Andrew J. Ceresney, director of the SEC Enforcement Division. “Those who might consider punishing whistleblowers should realize that such retaliation, in any form, is unacceptable.”

“For whistleblowers 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. “We will continue to exercise our anti-retaliation authority in these and other types of situations where a whistleblower is wrongfully targeted for doing the right thing and reporting a possible securities law violation.”

¹ For further analysis on the legal and practical dimensions of whistleblower protections, see Davis Polk’s June 9, 2014, Memorandum, Recent Developments in Whistleblower Protections: Legal Analysis and Practical Implications.

² The case is In the Matter of Paradigm Capital Management and Candace King Weir, case number 3-15930, before the Securities and Exchange Commission. The SEC’s order is available at http://www.sec.gov/litigation/ and its press release regarding the case is available at http://www.sec.gov/News/PressRelease/.